Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 2013 or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     

Commission file number: 001-32253

 

 

ENERSYS

 

 

(Exact name of registrant as specified in its charter)

 

Delaware   23-3058564

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2366 Bernville Road

Reading, Pennsylvania 19605

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 610-208-1991

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.01 par value per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  YES    ¨  NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  YES    x  NO

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    ¨  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

  Accelerated filer  ¨
Non-accelerated filer  ¨     Smaller reporting company  ¨

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  YES    x  NO

State the aggregate market value of the voting and non-voting common equity held by non-affiliates at September 30, 2012: $1,696,495,217 (1) (based upon its closing transaction price on the New York Stock Exchange on September 28, 2012).

 

(1) For this purpose only, “non-affiliates” excludes directors and executive officers.

Common stock outstanding at May 24, 2013:                          53,251,921 Shares of Common Stock

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on August 1, 2013 are incorporated by reference in Part III of this Annual Report.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of EnerSys. EnerSys and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to stockholders. Generally, the inclusion of the words “anticipates,” “believe,” “expect,” “future,” “intend,” “estimate,” “anticipate,” “will,” “plans,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that EnerSys expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management, and are applicable only as of the dates of such statements.

Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in this Annual Report on Form 10-K and other unforeseen risks. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Annual Report on Form 10-K, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Annual Report on Form 10-K.

Our actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including the following factors:

 

   

general cyclical patterns of the industries in which our customers operate;

 

   

the extent to which we cannot control our fixed and variable costs;

 

   

the raw materials in our products may experience significant fluctuations in market price and availability;

 

   

certain raw materials constitute hazardous materials that may give rise to costly environmental and safety claims;

 

   

legislation regarding the restriction of the use of certain hazardous substances in our products;

 

   

risks involved in our operations such as disruption of markets, changes in import and export laws, environmental regulations, currency restrictions and currency exchange rate fluctuations;

 

   

our ability to raise our selling prices to our customers when our product costs increase;

 

   

the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity;

 

   

general economic conditions in the markets in which we operate;

 

   

competitiveness of the battery markets throughout the world;

 

   

our timely development of competitive new products and product enhancements in a changing environment and the acceptance of such products and product enhancements by customers;

 

   

our ability to adequately protect our proprietary intellectual property, technology and brand names;

 

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litigation and regulatory proceedings to which we might be subject;

 

   

changes in our market share in the geographic business segments where we operate;

 

   

our ability to implement our cost reduction initiatives successfully and improve our profitability;

 

   

quality problems associated with our products;

 

   

our ability to implement business strategies, including our acquisition strategy, manufacturing expansion and restructuring plans;

 

   

our acquisition strategy may not be successful in locating advantageous targets;

 

   

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames;

 

   

our debt and debt service requirements which may restrict our operational and financial flexibility, as well as imposing unfavorable interest and financing costs;

 

   

our ability to maintain our existing credit facilities or obtain satisfactory new credit facilities;

 

   

adverse changes in our short- and long-term debt levels under our credit facilities;

 

   

our exposure to fluctuations in interest rates on our variable-rate debt;

 

   

our ability to attract and retain qualified personnel;

 

   

our ability to maintain good relations with labor unions;

 

   

credit risk associated with our customers, including risk of insolvency and bankruptcy;

 

   

our ability to successfully recover in the event of a disaster affecting our infrastructure;

 

   

terrorist acts or acts of war, could cause damage or disruption to our operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability; and

 

   

the operation, capacity and security of our information systems and infrastructure.

This list of factors that may affect future performance is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

 

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EnerSys

Annual Report on Form 10-K

For the Fiscal Year Ended March 31, 2013

Index

 

     Page  

PART I

     

Cautionary Note Regarding Forward-Looking Statements

     2   

Item 1.

  

Business

     5   

Item 1A.

  

Risk Factors

     10   

Item 1B.

  

Unresolved Staff Comments

     17   

Item 2.

  

Properties

     18   

Item 3.

  

Legal Proceedings

     18   

Item 4.

  

Mine Safety Disclosures

     18   

PART II

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     18   

Item 6.

  

Selected Financial Data

     21   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 8.

  

Financial Statements and Supplementary Data

     47   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     94   

Item 9A.

  

Controls and Procedures

     94   

Item 9B.

  

Other Information

     94   

PART III

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

     95   

Item 11.

  

Executive Compensation

     95   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters

     95   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     96   

Item 14.

  

Principal Accounting Fees and Services

     96   

PART IV

     

Item 15.

  

Exhibits, Financial Statement Schedules

     97   
  

Signatures

     101   

 

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PART I

 

ITEM 1. BUSINESS

Overview

EnerSys (the “Company,” “we,” or “us”) is the world’s largest manufacturer, marketer and distributor of industrial batteries. We also manufacture, market and distribute related products such as chargers, power equipment and battery accessories, and we provide related after-market and customer-support services for industrial batteries. We market and sell our products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force.

We operate and manage our business in three geographic regions of the world—Americas, EMEA and Asia, as described below. Our business is highly decentralized with manufacturing locations throughout the world. More than half of our manufacturing capacity is located outside of the United States, and approximately 60% of our net sales were generated outside of the United States. The Company has three reportable segments based on geographic regions, defined as follows:

 

   

Americas, which includes North and South America, with our segment headquarters in Reading, Pennsylvania, USA,

 

   

EMEA, which includes Europe, the Middle East and Africa, with our segment headquarters in Zurich, Switzerland, and

 

   

Asia, which includes Asia, Australia and Oceania, with our segment headquarters in Singapore.

We have two primary industrial battery product lines: reserve power products and motive power products. Net sales classifications by product line are as follows:

 

   

Reserve power products are used for backup power for the continuous operation of critical applications in telecommunications systems, uninterruptible power systems, or “UPS” applications for computer and computer-controlled systems, and other specialty power applications, including security systems, premium starting, lighting and ignition applications, in switchgear, electrical control systems used in electric utilities, large scale energy storage, energy pipelines, in commercial aircraft, satellites, military aircraft, submarines, ships and tactical vehicles.

 

   

Motive power products are used to provide power for manufacturing, warehousing and other material handling equipment, primarily electric industrial forklift trucks, mining equipment, diesel locomotive starting and other rail equipment.

Additionally, see Note 22 to the Consolidated Financial Statements for information on segment reporting.

Fiscal Year Reporting

In this Annual Report on Form 10-K, when we refer to our fiscal years, we state “fiscal” and the year, as in “fiscal 2013”, which refers to our fiscal year ended March 31, 2013. The Company reports interim financial information for 13-week periods, except for the first quarter, which always begins on April 1, and the fourth quarter, which always ends on March 31. The four quarters in fiscal 2013 ended on July 1, 2012, September 30, 2012, December 30, 2012, and March 31, 2013, respectively. The four quarters in fiscal 2012 ended on July 3, 2011, October 2, 2011, January 1, 2012, and March 31, 2012, respectively.

History

EnerSys and its predecessor companies have been manufacturers of industrial batteries for over 100 years. Morgan Stanley Capital Partners teamed with the management of Yuasa, Inc. in late 2000 to acquire from Yuasa

 

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Corporation (Japan) its reserve power and motive power battery businesses in North and South America. We were incorporated in October 2000 for the purpose of completing the Yuasa, Inc. acquisition. On January 1, 2001, we changed our name from Yuasa, Inc. to EnerSys to reflect our focus on the energy systems nature of our businesses.

In 2004, EnerSys completed its initial public offering (the “IPO”). The Company’s registration statement (SEC File No. 333-115553) for its IPO was declared effective by the Securities and Exchange Commission (the “SEC”) and the Company’s common stock commenced trading on the New York Stock Exchange, under the trading symbol “ENS”.

Key Developments

There have been several key stages in the development of our business, which explain to a significant degree our results of operations over the past several years.

In March 2002, we acquired the reserve power and motive power business of the Energy Storage Group of Invensys plc. (“ESG”). Our successful integration of ESG provided global scale in both the reserve and motive power markets. The ESG acquisition also provided us with a further opportunity to reduce costs and improve operating efficiency that, among other initiatives, led to closing underutilized manufacturing plants, distribution facilities, sales offices and eliminating other redundant costs, including staff.

During fiscal years 2003 through 2012, we acquired twenty-two battery businesses around the globe.

While there were no acquisitions during fiscal 2013, we announced in March 2013 our plans to construct a new battery manufacturing facility in Gaoyou City, Jiangsu Province, People’s Republic of China for the production of industrial batteries for Chinese and international markets. The new facility is scheduled to be completed by 2015 and will provide capacity to meet increasing customer demand in these markets.

Liquidity and Capital Resources

We believe that our financial position is strong and we have substantial liquidity with $249 million of available cash and cash equivalents and undrawn committed and uncommitted credit lines of approximately $469 million at March 31, 2013 to cover short-term liquidity requirements. Our $350 million 2011 senior secured revolving credit facility (“2011 Credit Facility”), which we entered into in March 2011, is committed through March 2016 as long as we continue to comply with its covenants and conditions. The facility includes an early termination provision under which the Company is required to meet a liquidity test in February 2015 related to its capacity to meet certain potential funding obligations of the $172.5 million senior unsecured 3.375% convertible notes (“Convertible Notes”) in June 2015 at a conversion price of $40.60. It is our current intent to settle the principal amount of any such conversion in cash, and any additional optional conversions in cash, shares of EnerSys common stock or a combination of cash and shares.

Other than the 2011 Credit Facility, on which we have no outstanding balance as of March 31, 2013, and the Convertible Notes, we have no other significant amount of long-term debt maturing in the near future.

A substantial majority of the Company’s cash and investments are held by foreign subsidiaries and are considered to be indefinitely reinvested and expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.

(See Liquidity and Capital Resources in Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Note 8 in Notes to Consolidated Financial Statements in Item 8).

 

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Our Customers

We serve over 10,000 customers in over 100 countries, on a direct basis or through our distributors. We are not overly dependent on any particular end market. Our customer base is highly diverse and no single customer accounts for more than 5% of our revenues.

Our reserve power customers consist of regional customers as well as global customers. These customers are in diverse markets including telecom, UPS, electric utilities, security systems, emergency lighting, premium starting, lighting and ignition applications and space satellites. In addition, we sell our aerospace and defense products in numerous countries, including the governments of the U.S., Germany and the U.K. and to major defense and aviation original equipment manufacturers (“OEMs”).

Our motive power products are sold to a large, diversified customer base. These customers include material handling equipment dealers, OEMs and end users of such equipment. End users include manufacturers, distributors, warehouse operators, retailers, airports, mine operators and railroads.

Distribution and Services

We distribute, sell and service reserve and motive power products throughout the world, principally through company-owned sales and service facilities, as well as through independent manufacturers’ representatives. This company-owned network allows us to offer high-quality service, including preventative maintenance programs and customer support. Our warehouses and service locations enable us to respond quickly to customers in the markets we serve. We believe that the extensive industry experience of our sales organization results in strong long-term customer relationships.

Manufacturing and Raw Materials

We manufacture and assemble our products at manufacturing facilities located in the Americas, EMEA and Asia. With a view toward projected demand, we strive to optimize and balance capacity at our battery manufacturing facilities globally, while simultaneously minimizing our product cost. By taking a global view of our manufacturing requirements and capacity, we are better able to anticipate potential capacity bottlenecks and equipment and capital funding needs.

The primary raw materials used to manufacture our products include lead, plastics, steel and copper. We purchase lead from a number of leading suppliers throughout the world. Because lead is traded on the world’s commodity markets and its price fluctuates daily, we periodically enter into hedging arrangements for a portion of our projected requirements to reduce the volatility of our costs.

Competition

The industrial battery market is highly competitive both among competitors who manufacture and sell industrial batteries and among customers who purchase industrial batteries. Our competitors range from development stage companies to large domestic and international corporations. Certain of our competitors produce energy storage products utilizing technologies that we do not possess at this time. We compete primarily on the basis of reputation, product quality, reliability of service, delivery and price. We believe that our products and services are competitively priced.

EMEA

We believe that we have the largest market share in the European industrial battery market. Our primary competitors are Exide Technologies, Hoppecke, FIAMM, NorthStar Battery, SAFT as well as Chinese producers in the reserve products market; and Exide Technologies, Hoppecke and Midac in the motive products market.

 

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Americas

We believe that we have the largest market share in the Americas industrial battery market. We compete principally with Exide Technologies, East Penn Manufacturing and Newpower in the reserve and motive products markets; and C&D Technologies Inc., NorthStar Battery, SAFT and EaglePicher (OM Group) in the reserve products market.

Asia

We have a small share of the fragmented Asian industrial battery market. We compete principally with GS-Yuasa, Shin-Kobe and Zibo Torch in the motive products market and Coslight, Amara Raja, Narada, Leoch, Exide Industries and China Shoto in the reserve products market.

Warranties

Warranties for our products vary geographically and by product type and are competitive with other suppliers of these types of products. Generally, our reserve power product warranties range from one to twenty years and our motive power product warranties range from one to seven years. The length of our warranties is varied to reflect regional characteristics and competitive influences. In some cases, our warranty period may include a pro rata period, which is typically based around the design life of the product and the application served. Our warranties generally cover defects in workmanship and materials and are limited to specific usage parameters.

Intellectual Property

We have numerous patents and patent licenses in the United States and other jurisdictions but do not consider any one patent to be material to our business. From time to time, we apply for patents on new inventions and designs, but we believe that the growth of our business will depend primarily upon the quality of our products and our relationships with our customers, rather than the extent of our patent protection.

Although other manufacturers may possess certain thin plate pure lead (“TPPL”) technology, we believe we are the only manufacturer of products using this technology in the reserve and motive power markets. Some aspects of this technology may be patented in the future. In any event, we believe that a significant capital investment would be required by any party desiring to produce products using TPPL technology for our markets.

We own or possess exclusive and non-exclusive licenses and other rights to use a number of trademarks in various jurisdictions. We have obtained registrations for many of these trademarks in the United States and other jurisdictions. Our various trademark registrations currently have durations of approximately 10 to 20 years, varying by mark and jurisdiction of registration and may be renewable. We endeavor to keep all of our material registrations current. We believe that many such rights and licenses are important to our business by helping to develop strong brand-name recognition in the marketplace. Some of the significant (registered and unregistered) trademarks that we use include: ArmaSafePlus, Cyclon, DataSafe, Deserthog, Douglas Battery, Douglas Legacy, EAS, Energia, EnerSystem, Energy Leader, FIAMM Motive Power, General Battery, Genesis, Hawker, Huada, HUP, Ironclad, LifeGuard, LifePlus, Life Speed, LifeTech, Loadhog, Odyssey, Oerlikon Battery, Oldham, Perfect Plus, PowerGuard, PowerSafe, ProSeries, Redion, Smarthog, Superhog, Supersafe, TeleData, Waterless, Wi-IQ, Workhog and XFC.

Today, our reserve power batteries are marketed and sold principally under the ABSL, ABSL Power, ABSL Space, ArmaSafePlus, Cyclon, DataSafe, Genesis, Hawker, Huada, Odyssey, Oerlikon Battery, PowerSafe and SuperSafe brands. Our motive power batteries are marketed and sold principally under the Douglas Battery, Express, Fiamm Motive Power, General Battery, Hawker, Huada and Ironclad brands. We also manufacture and sell related “DC” (Direct Current) power products including chargers, electronic power equipment and a wide variety of battery accessories. Our battery products span a broad range of sizes, configurations and electrical capacities, enabling us to meet a wide variety of customer applications.

 

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Seasonality

Our business generally does not experience significant quarterly fluctuations in net sales as a result of weather or other trends that can be directly linked to seasonality patterns.

Product and Process Development

Our product and process development efforts are focused on the creation and optimization of new battery products using existing technologies, which, in certain cases, differentiate our stored energy solutions from that of our competition. We allocate our resources to the following key areas:

 

   

the design and development of new products;

 

   

optimizing and expanding our existing product offering;

 

   

waste and scrap reduction;

 

   

production efficiency and utilization;

 

   

capacity expansion without additional facilities; and

 

   

quality attribute maximization.

Employees

At March 31, 2013, we had approximately 9,000 employees. Of these employees, approximately 35% were covered by collective bargaining agreements. The average term of these agreements is two years, with the longest term being four years. Approximately 33% of these agreements expire over the next twelve months.

We consider our employee relations to be good. We have not experienced any significant labor unrest or disruption of production during fiscal 2013.

Environmental Matters

In the manufacture of our products throughout the world, we process, store, dispose of and otherwise use large amounts of hazardous materials, especially lead and acid. As a result, we are subject to extensive and evolving environmental, health and safety laws and regulations governing, among other things: the generation, handling, storage, use, transportation and disposal of hazardous materials; emissions or discharges of hazardous materials into the ground, air or water; and the health and safety of our employees. In addition, we are required to comply with the regulation issued from the European Economic Union called Registration, Evaluation, Authorization and Restriction of Chemicals or “REACH,” that came into force on June 1, 2007. Under the regulation, companies which manufacture or import more than one ton of a covered chemical substance per year are required to register it in a central database administered by the European Chemicals Agency. REACH requires a registration over a period of 11 years. Compliance with these laws and regulations results in ongoing costs. Failure to comply with these laws and regulations, or to obtain or comply with required environmental permits, could result in fines, criminal charges or other sanctions by regulators. From time to time, we have had instances of alleged or actual noncompliance that have resulted in the imposition of fines, penalties and required corrective actions. Our ongoing compliance with environmental, health and safety laws, regulations and permits could require us to incur significant expenses, limit our ability to modify or expand our facilities or continue production and require us to install additional pollution control equipment and make other capital improvements. In addition, private parties, including current or former employees, can bring personal injury or other claims against us due to the presence of, or their exposure to, hazardous substances used, stored, transported or disposed of by us or contained in our products.

 

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Sumter, South Carolina

We currently are responsible for certain environmental obligations at our former battery facility in Sumter, South Carolina that predate our ownership of this facility. This battery facility was closed in 2001 and is separate from our current metal fabrication facility in Sumter. We have a reserve for this facility that totaled $2.9 million as of March 31, 2013. Based on current information, we believe this reserve is adequate to satisfy our environmental liabilities at this facility.

Environmental and safety certifications

Thirteen of our facilities in the Americas, EMEA and Asia are certified to ISO 14001 standards. ISO 14001 is a globally recognized, voluntary program that focuses on the implementation, maintenance and continual improvement of an environmental management system and the improvement of environmental performance. Two facilities in Europe and one in Africa are certified to OHSAS 18001 standards. OHSAS 18001 is a globally recognized occupational health and safety management systems standard.

Quality Systems

We utilize a global strategy for quality management systems, policies and procedures, the basis of which is the ISO 9001:2008 standard, which is a worldwide recognized quality standard. We believe in the principles of this standard and reinforce this by requiring mandatory compliance for all manufacturing, sales and service locations globally that are registered to the ISO 9001 standard. This strategy enables us to provide consistent quality products and services to meet our customers’ needs.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our Internet address is http://www.enersys.com. We make available free of charge on http://www.enersys.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

 

ITEM 1A. RISK FACTORS

The following risks and uncertainties, as well as others described in this Annual Report on Form 10-K, could materially and adversely affect our business, our results of operations and financial conditions and could cause actual results to differ materially from our expectations and projections. Stockholders are cautioned that these and other factors, including those beyond our control, may affect future performance and cause actual results to differ from those which may, from time to time, be anticipated. There may be additional risks that are not presently material or known. See “Cautionary Note Regarding Forward-Looking Statements.” All forward-looking statements made by us or on our behalf are qualified by the risks described below.

We operate in an extremely competitive industry and are subject to pricing pressures.

We compete with a number of major international manufacturers and distributors, as well as a large number of smaller, regional competitors. Due to excess capacity in some sectors of our industry and consolidation among industrial battery purchasers, we have been subjected to significant pricing pressures. We anticipate continued competitive pricing pressure as foreign producers are able to employ labor at significantly lower costs than

 

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producers in the U.S. and Western Europe, expand their export capacity and increase their marketing presence in our major Americas and European markets. Several of our competitors have strong technical, marketing, sales, manufacturing, distribution and other resources, as well as significant name recognition, established positions in the market and long-standing relationships with OEMs and other customers. In addition, certain of our competitors own lead smelting facilities which, during periods of lead cost increases or price volatility, may provide a competitive pricing advantage and reduce their exposure to volatile raw material costs. Our ability to maintain and improve our operating margins has depended, and continues to depend, on our ability to control and reduce our costs. We cannot assure you that we will be able to continue to reduce our operating expenses, to raise or maintain our prices or increase our unit volume, in order to maintain or improve our operating results.

The uncertainty in global economic conditions could negatively affect the Company’s operating results.

Our operating results are directly affected by the general global economic conditions of the industries in which our major customer groups operate. Our business segments are highly dependent on the economic and market conditions in each of the geographic areas in which we operate. Our products are heavily dependent on the end markets that we serve and our operating results will vary by geographic segment, depending on the economic environment in these markets. Sales of our motive power products, for example, depend significantly on demand for new electric industrial forklift trucks, which in turn depends on end-user demand for additional motive capacity in their distribution and manufacturing facilities. The uncertainty in global economic conditions varies by geographic segment, and can result in substantial volatility in global credit markets, particularly in the United States, where we service the vast majority of our debt. These conditions affect our business by reducing prices that our customers may be able or willing to pay for our products or by reducing the demand for our products, which could in turn negatively impact our sales and earnings generation and result in a material adverse effect on our business, cash flow, results of operations and financial position.

Risk of forced conversion of Convertible Notes which could adversely affect the Company’s liquidity.

Under the terms of our Convertible Notes, a holder of Convertible Notes may require the Company to repurchase some or all of the holder’s Convertible Notes for cash upon the occurrence of a fundamental change as defined in the indenture and on each of June 1, 2015, 2018, 2023, 2028 and 2033 at a price equal to 100% of the accreted principal amount of the Convertible Notes being repurchased, plus accrued and unpaid interest, if any, in each case. As of March 31, 2013, the Company has $172.5 million of Convertible Notes outstanding.

It is the Company’s current intent to settle the principal amount of any such conversions in cash, and any additional optional conversions in cash, shares of EnerSys common stock or a combination of cash and shares. To the extent that then existing domestic cash balances and cash flow from operations, together with borrowing capacity under then existing credit facilities, are insufficient to satisfy any such settlement or optional put or conversion, we may require additional financing from other sources. Our ability to obtain such additional financing in the future will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results; and those factors may affect our efforts to arrange additional financing on terms that are acceptable to us. The Convertible Notes will mature on June 1, 2038, unless earlier converted, redeemed or repurchased by the Company.

Reliance on third party relationships and derivative agreements could adversely affect the Company’s business.

We depend on third parties, including suppliers, distributors, lead toll operators, freight forwarders, insurance brokers, commodity brokers, major financial institutions and other third party service providers, for key aspects of our business including the provision of derivative contracts to manage risks of: (a) lead cost volatility, (b) foreign currency exposures and (c) interest rate volatility. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt our relationships with these third parties could expose us to the risks of business disruption, higher lead costs, unfavorable foreign currency rates and higher expenses, which could have a material adverse effect on our business.

 

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Our raw materials costs are volatile and expose us to significant movements in our product costs.

Lead is our most significant raw material and is used along with significant amounts of plastics, steel, copper and other materials in our manufacturing processes. We estimate that raw material costs account for over half of our cost of goods sold. The costs of these raw materials, particularly lead, are volatile and beyond our control. Volatile raw material costs can significantly affect our operating results and make period-to-period comparisons extremely difficult. We cannot assure you that we will be able to hedge the costs of our raw material requirements at a reasonable level or, even with respect to our agreements that adjust pricing to a market-based index for lead, pass on to our customers the increased costs of our raw materials.

Our operations expose us to litigation, tax, environmental and other legal compliance risks.

We are subject to a variety of litigation, tax, environmental, health and safety and other legal compliance risks. These risks include, among other things, possible liability relating to product liability matters, personal injuries, intellectual property rights, contract-related claims, government contracts, taxes, health and safety liabilities, environmental matters and compliance with U.S. and foreign laws, competition laws and laws governing improper business practices. We or one of our business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments or other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights.

In the area of taxes, changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance could materially impact our tax receivables and liabilities and our deferred tax assets and tax liabilities. Additionally, in the ordinary course of business, we are subject to examinations by various authorities, including tax authorities. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in various jurisdictions and existing investigations could be expanded. The global and diverse nature of our operations means that these risks will continue to exist and additional legal proceedings and contingencies will arise from time to time. Our results may be affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty.

In the manufacture of our products throughout the world, we process, store, dispose of and otherwise use large amounts of hazardous materials, especially lead and acid. As a result, we are subject to extensive and changing environmental, health and safety laws and regulations governing, among other things: the generation, handling, storage, use, transportation and disposal of hazardous materials; remediation of polluted ground or water; emissions or discharges of hazardous materials into the ground, air or water; and the health and safety of our employees. Compliance with these laws and regulations results in ongoing costs. Failure to comply with these laws or regulations, or to obtain or comply with required environmental permits, could result in fines, criminal charges or other sanctions by regulators. From time to time we have had instances of alleged or actual noncompliance that have resulted in the imposition of fines, penalties and required corrective actions. Our ongoing compliance with environmental, health and safety laws, regulations and permits could require us to incur significant expenses, limit our ability to modify or expand our facilities or continue production and require us to install additional pollution control equipment and make other capital improvements. In addition, private parties, including current or former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us or contained in our products.

Certain environmental laws assess liability on owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances at their current or former properties or at properties at which they have disposed of hazardous substances. These laws may also assess costs to repair

 

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damage to natural resources. We may be responsible for remediating damage to our properties that was caused by former owners. Soil and groundwater contamination has occurred at some of our current and former properties and may occur or be discovered at other properties in the future. We are currently investigating and monitoring soil and groundwater contamination at several of our properties, in most cases as required by regulatory permitting processes. We may be required to conduct these operations at other properties in the future. In addition, we have been and in the future may be liable to contribute to the cleanup of locations owned or operated by other persons to which we or our predecessor companies have sent wastes for disposal, pursuant to federal and other environmental laws. Under these laws, the owner or operator of contaminated properties and companies that generated, disposed of or arranged for the disposal of wastes sent to a contaminated disposal facility can be held jointly and severally liable for the investigation and cleanup of such properties, regardless of fault.

Changes in environmental and climate laws or regulations, including laws relating to greenhouse gas emissions, could lead to new or additional investment in production designs and could increase environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such concerns, including greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw materials costs. Additionally, we cannot assure you that we have been or at all times will be in compliance with environmental laws and regulations or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits, or that we will not be exposed to material environmental, health or safety litigation.

Also, the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Certain of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite meaningful measures that we undertake to facilitate lawful conduct, which include training and internal control policies, these measures may not always prevent reckless or criminal acts by our employees or agents. As a result, we could be subject to criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes or other remedial actions. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and result in a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

There is also a regulation to improve the transparency and accountability concerning the supply of minerals coming from the conflict zones in and around the Democratic Republic of Congo. New U.S. legislation includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. The implementation of these requirements could affect the sourcing and availability of minerals used in the manufacture of our products. As a result, there may only be a limited pool of suppliers who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Future regulations may become more stringent or costly and our compliance costs and potential liabilities could increase, which may harm our business.

We are exposed to exchange rate risks, and our net earnings and financial condition may suffer due to currency translations.

We invoice our foreign sales and service transactions in local and foreign currencies and translate net sales using actual exchange rates during the period. We translate our non-U.S. assets and liabilities into U.S. dollars using current exchange rates as of the balance sheet dates. Because a significant portion of our revenues and

 

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expenses are denominated in foreign currencies, changes in exchange rates between the U.S. dollar and foreign currencies, primarily the euro, British pound, Polish zloty, Chinese renminbi, Mexican peso and Swiss franc may adversely affect our revenue, cost of goods sold and operating margins. For example, foreign currency depreciation against the U.S. dollar will reduce the value of our foreign revenues and operating earnings as well as reduce our net investment in foreign subsidiaries. Approximately 60% of net sales were generated outside of the United States for the last three fiscal years.

Most of the risk of fluctuating foreign currencies is in our EMEA segment, which comprised just under 50% of our net sales during the last two fiscal years. The euro is the dominant currency in our EMEA operations. In the event that one or more European countries were to replace the euro with another currency, our sales into such countries, or into Europe generally, would likely be adversely affected until stable exchange rates are established.

The translation impact from currency fluctuations on net sales and operating earnings in Americas and Asia segments are not significant, as a substantial majority of these net sales and operating earnings are in U.S. dollars or foreign currencies that have been closely correlated to the U.S. dollar.

If foreign currencies depreciate against the U.S. dollar, it would make it more expensive for our non-U.S. subsidiaries to purchase certain of our raw material commodities that are priced globally in U.S. dollars, while the related revenue will decrease when translated to U.S. dollars. Significant movements in foreign exchange rates can have a material impact on our results of operations and financial condition. We periodically engage in hedging of our foreign currency exposures, but cannot assure you that we can successfully hedge all of our foreign currency exposures or do so at a reasonable cost.

We quantify and monitor our global foreign currency exposures. Our largest foreign currency exposure is from the purchase and conversion of U.S. dollar based lead costs into local currencies in Europe. Additionally, we have currency exposures from intercompany financing and trade transactions. On a selective basis, we enter into foreign currency forward contracts and option contracts to reduce the impact from the volatility of currency movements; however, we cannot be certain that foreign currency fluctuations will not impact our operations in the future.

Our international operations may be adversely affected by actions taken by foreign governments or other forces or events over which we may have no control.

We currently have significant manufacturing and/or distribution facilities outside of the United States, in Argentina, Australia, Belgium, Brazil, Bulgaria, Canada, the Czech Republic, France, Germany, India, Italy, Mexico, People’s Republic of China, Poland, South Africa, Spain, Switzerland, Tunisia and the United Kingdom. We may face political instability, economic uncertainty, and/or difficult labor relations in our foreign operations. We also may face barriers in the form of long-standing relationships between potential customers and their existing suppliers, national policies favoring domestic manufacturers and protective regulations including exchange controls, restrictions on foreign investment or the repatriation of profits or invested capital, changes in export or import restrictions and changes in the tax system or rate of taxation in countries where we do business. We cannot assure you that we will be able to successfully develop and expand our international operations and sales or that we will be able to overcome the significant obstacles and risks of our international operations.

Our failure to introduce new products and product enhancements and broad market acceptance of new technologies introduced by our competitors could adversely affect our business.

Many new energy storage technologies have been introduced over the past several years. For certain important and growing markets, such as aerospace and defense, lithium-based battery technologies have a large and growing market share. Our ability to achieve significant and sustained penetration of key developing markets, including aerospace and defense, will depend upon our success in developing or acquiring these and other technologies, either independently, through joint ventures or through acquisitions. If we fail to develop or

 

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acquire, and manufacture and sell, products that satisfy our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing competitive products, then market acceptance of our products could be reduced and our business could be adversely affected. We cannot assure you that our lead-acid products will remain competitive with products based on new technologies.

We may not be able to adequately protect our proprietary intellectual property and technology.

We rely on a combination of copyright, trademark, patent and trade secret laws, non-disclosure agreements and other confidentiality procedures and contractual provisions to establish, protect and maintain our proprietary intellectual property and technology and other confidential information. Certain of these technologies, especially TPPL technology, are important to our business and are not protected by patents. Despite our efforts to protect our proprietary intellectual property and technology and other confidential information, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property and proprietary technologies.

Relocation of our customers’ operations could adversely affect our business.

The trend by a number of our North American and Western European customers to move manufacturing operations and expand their businesses in faster growing and low labor-cost markets may have an adverse impact on our business. As our customers in traditional manufacturing-based industries seek to move their manufacturing operations to these locations, there is a risk that these customers will source their energy storage products from competitors located in those territories and will cease or reduce the purchase of products from our manufacturing plants. We cannot assure you that we will be able to compete effectively with manufacturing operations of energy storage products in those territories, whether by establishing or expanding our manufacturing operations in those lower-cost territories or acquiring existing manufacturers.

We may fail to implement our cost reduction initiatives successfully and improve our profitability.

We must continue to implement cost reduction initiatives to achieve additional cost savings in future periods. We cannot assure you that we will be able to achieve all of the cost savings that we expect to realize from current or future initiatives. In particular, we may be unable to implement one or more of our initiatives successfully or we may experience unexpected cost increases that offset the savings that we achieve. Given the continued competitive pricing pressures experienced in our industry, our failure to realize cost savings would adversely affect our results of operations.

Quality problems with our products could harm our reputation and erode our competitive position.

The success of our business will depend upon the quality of our products and our relationships with customers. In the event that our products fail to meet our customers’ standards, our reputation could be harmed, which would adversely affect our marketing and sales efforts. We cannot assure you that our customers will not experience quality problems with our products.

We offer our products under a variety of brand names, the protection of which is important to our reputation for quality in the consumer marketplace.

We rely upon a combination of trademark, licensing and contractual covenants to establish and protect the brand names of our products. We have registered many of our trademarks in the U.S. Patent and Trademark Office and in other countries. In many market segments, our reputation is closely related to our brand names. Monitoring unauthorized use of our brand names is difficult, and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. We cannot assure you that our brand names will not be misappropriated or utilized without our consent or that such actions will not have a material adverse effect on our reputation and on our results of operations.

 

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We may fail to implement our plans to make acquisitions or successfully integrate them into our operations.

As part of our business strategy, we have grown, and plan to continue growing, by acquiring other product lines, technologies or facilities that complement or expand our existing business. There is significant competition for acquisition targets in the industrial battery industry. We may not be able to identify suitable acquisition candidates or negotiate attractive terms. In addition, we may have difficulty obtaining the financing necessary to complete transactions we pursue. In that regard, our credit facilities restrict the amount of additional indebtedness that we may incur to finance acquisitions and place other restrictions on our ability to make acquisitions. Exceeding any of these restrictions would require the consent of our lenders. We may be unable to successfully integrate any assets, liabilities, customers, systems and management personnel we acquire into our operations and we may not be able to realize related revenue synergies and cost savings within expected time frames. Our failure to execute our acquisition strategy could have a material adverse effect on our business. We cannot assure you that our acquisition strategy will be successful or that we will be able to successfully integrate acquisitions we do make.

Any acquisitions that we complete may dilute stockholder ownership interests in EnerSys, may have adverse effects on our financial condition and results of operations and may cause unanticipated liabilities.

Future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. Any future issuances of equity securities would dilute stockholder ownership interests. In addition, future acquisitions might not increase, and may even decrease our earnings or earnings per share and the benefits derived by us from an acquisition might not outweigh or might not exceed the dilutive effect of the acquisition. We also may incur additional debt or suffer adverse tax and accounting consequences in connection with any future acquisitions.

The failure or security breach of critical computer systems could seriously affect our sales and operations.

We operate a number of critical computer systems throughout our business that can fail for a variety of reasons. If such a failure were to occur, we may not be able to sufficiently recover from the failure in time to avoid the loss of data or any adverse impact on certain of our operations that are dependent on such systems. This could result in lost sales and the inefficient operation of our facilities for the duration of such a failure.

We operate a number of critical computer systems throughout our business for the exchange of information both within the company and in communicating with third parties. Despite our efforts to protect the integrity of our systems and network as well as sensitive, confidential or personal data or information, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches, theft, misplaced or lost data, programming and/or human errors that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness, and results of operations.

Our ability to maintain adequate credit facilities.

Our ability to continue our ongoing business operations and fund future growth depends on our ability to maintain adequate credit facilities and to comply with the financial and other covenants in such credit facilities or to secure alternative sources of financing. However, such credit facilities or alternate financing may not be available or, if available, may not be on terms favorable to us.

Our indebtedness could adversely affect our financial condition and results of operations.

As of March 31, 2013, we had $178.5 million of total consolidated debt (including capital lease obligations and net of the discount on the Convertible Notes). This level of debt could:

 

   

increase our vulnerability to adverse general economic and industry conditions, including interest rate fluctuations, because a portion of our borrowings bear, and will continue to bear, interest at floating rates;

 

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require us to dedicate a substantial portion of our cash flow from operations to debt service payments, which would reduce the availability of our cash to fund working capital, capital expenditures or other general corporate purposes, including acquisitions;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and industry;

 

   

restrict our ability to introduce new products or new technologies or exploit business opportunities;

 

   

place us at a disadvantage compared with competitors that have proportionately less debt;

 

   

limit our ability to borrow additional funds in the future, if we need them, due to financial and restrictive covenants in our debt agreements;

 

   

have a material adverse effect on us if we fail to comply with the financial and restrictive covenants in our debt agreements; and

 

   

dilute share ownership percentage if the Company’s share price, at the time of conversion, is higher than the Convertible Notes’ conversion price of $40.60 per share and the Company does not settle the Convertible Notes, including any optional conversions, solely in cash.

There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.

On May 28, 2013, we announced the declaration of our first quarterly cash dividend of $0.125 per share of common stock to be paid on June 28, 2013 to stockholders of record as of June 14, 2013. Future payment of a regular quarterly cash dividend on our common shares will be subject to, among other things, our results of operations, cash balances and future cash requirements, financial condition, statutory requirements of Delaware law, compliance with the terms of existing and future indebtedness and credit facilities, and other factors that the Board of Directors may deem relevant. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on our share price.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The Company’s worldwide headquarters is located in Reading, Pennsylvania. Geographic headquarters for our Americas, EMEA and Asia segments are located in Reading, Pennsylvania, Zurich, Switzerland and Singapore, respectively. The Company owns approximately 80% of its manufacturing facilities and distribution centers worldwide. The following sets forth the Company’s principal owned or leased facilities by business segment:

Americas: Longmont, Colorado; Hays, Kansas; Richmond, Kentucky; Warrensburg, Missouri; Cleveland, Ohio; Horsham, Pennsylvania; Sumter, South Carolina; and Ooltewah, Tennessee in the United States; Monterrey and Tijuana in Mexico; Buenos Aires, Argentina and Sao Paulo in Brazil.

EMEA: Targovishte, Bulgaria; Hostimice, Czech Republic; Arras, France; Hagen and Zwickau in Germany; Bielsko-Biala, Poland; Newport, Culhman and Thurso in the United Kingdom; Port Elizabeth, South Africa; and Tunis, Tunisia.

Asia: Jiangsu, Chaoan and Chongqing in the People’s Republic of China and Andhra Pradesh in India.

We consider our plants and facilities, whether owned or leased, to be in satisfactory condition and adequate to meet the needs of our current businesses and projected growth. Information as to material lease commitments is included in Note 9, “Leases,” to the Consolidated Financial Statements appearing in this Annual Report on Form 10-K.

 

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in litigation incidental to the conduct of our business. We do not expect that any of this litigation, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flow.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s common stock has been listed on the New York Stock Exchange under the symbol “ENS” since it began trading on July 30, 2004. Prior to that time, there had been no public market for our common stock. The following table sets forth, on a per share basis for the periods presented, the range of high, low and closing prices of the Company’s common stock.

 

Quarter Ended

  

High Price

    

Low Price

    

Closing Price

 

March 31, 2013

   $ 45.87       $ 36.57       $ 45.58   

December 30, 2012

     37.73         31.07         36.80   

September 30, 2012

     39.61         31.77         35.29   

July 1, 2012

     35.80         30.02         35.07   

March 31, 2012

   $ 36.15       $ 25.93       $ 34.65   

January 1, 2012

     27.25         17.50         25.97   

October 2, 2011

     36.48         17.35         20.02   

July 3, 2011

     40.32         30.95         35.21   

 

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Holders of Record

As of May 24, 2013, there were approximately 353 record holders of common stock of the Company. Because many of these shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

Dividends

On May 28, 2013, we announced the payment of our first quarterly cash dividend of $0.125 per share of common stock to be paid on June 28, 2013 to stockholders of record as of June 14, 2013. The declaration of cash dividends on our common stock is at the discretion of the Board of Directors, and any decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, applicable covenants under our credit agreements and other contractual restrictions, Delaware law and other factors deemed relevant.

Recent Sales of Unregistered Securities

During the three fiscal years ended March 31, 2013, we did not issue any unregistered securities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The table below sets forth information regarding the Company’s purchases of its common stock during its fourth quarter ended March 31, 2013:

Purchases of Equity Securities

 

Period

   (a)
Total number
of shares (or
units)
purchased
    (b)
Average price
paid per share
(or unit)
     (c)
Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs
     (d)
Maximum number
(or approximate
dollar value) of shares
(or units) that may be
purchased under the
plans or programs(2)(3)(4)
 

December 31, 2012-January 27, 2013

     —        $ —               —         $ 50,508,064   

January 28, 2013-February 24, 2013

     1,415 (1)      41.00         —           51,545,998   

February 25, 2013-March 31, 2013

     —          —           —           66,658,304   
  

 

 

   

 

 

    

 

 

    

Total

     1,415      $ 41.00         —        
  

 

 

   

 

 

    

 

 

    

 

(1) As provided in our equity incentive plans, vested options may be exercised through surrender to the Company of option shares or vested options outstanding under our equity incentive plans to satisfy the applicable aggregate exercise price (and withholding tax) required to be paid upon such exercise.
(2) On May 26, 2011, the Company’s Board of Directors authorized the Company to repurchase up to the number of shares exercised through previous stock option awards and repurchase shares up to the amount necessary to offset the dilutive effect of the common stock granted under the 2010 Equity Incentive Plan. As of January 27, 2013, February 24, 2013 and March 31, 2013, this repurchase limit amounted to a total 12,278 shares, 37,361 shares, and 40,075 shares, respectively, that may be repurchased under this program. For purposes of presenting the approximate dollar value of shares that may be purchased under this program, we multiplied the remaining balance under this program by $41.38 per share, which is the average closing price of the Company’s common stock during the period.
(3) On May 24, 2012, the Company’s Board of Directors authorized the Company to repurchase up to $50 million of its common stock. This authorization expired on March 31, 2013 and was unutilized.
(4) The Company’s Board of Directors authorized the Company to repurchase up to $65 million of its common stock. This authorization expires on March 31, 2014.

 

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STOCK PERFORMANCE GRAPH

The following graph compares the changes in cumulative total returns on EnerSys’ common stock with the changes in cumulative total returns of the New York Stock Exchange Composite Index, a broad equity market index, and the total return on a selected peer group index. The peer group selected is based on the standard industrial classification codes (“SIC Codes”) established by the U.S. government. The index chosen was “Miscellaneous Electrical Equipment and Suppliers” and comprises all publicly traded companies having the same three-digit SIC Code (369) as EnerSys.

The graph was prepared assuming that $100 was invested in EnerSys’ common stock, the New York Stock Exchange Composite Index and the peer group (duly updated for changes) on March 31, 2008.

 

LOGO

 

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ITEM 6. SELECTED FINANCIAL DATA

 

     Fiscal Year Ended March 31,  
     2013     2012     2011     2010     2009  
     (In thousands, except share and per share data)  

Consolidated Statements of Income:

          

Net sales

   $ 2,277,559      $ 2,283,369      $ 1,964,462      $ 1,579,385      $ 1,972,867   

Cost of goods sold

     1,708,203        1,770,664        1,514,618        1,218,481        1,559,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     569,356        512,705        449,844        360,904        413,434   

Operating expenses

     312,324        297,806        259,217        235,597        256,507   

Restructuring charges

     7,164        4,988        6,813        13,929        22,424   

Legal proceedings (settlement income) charge

     —          (900     —          —          3,366   

Bargain purchase gain

     —          —          —          (2,919     —     

Gain on sale of facilities

     —          —          —          —          (11,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     249,868        210,811        183,814        114,297        142,445   

Interest expense

     18,719        16,484        22,038        22,658        26,733   

Charges related to refinancing

     —          —          8,155        —          5,209   

Other (income) expense, net

     916        3,068        2,177        4,384        (8,597
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     230,233        191,259        151,444        87,255        119,100   

Income tax expense

     65,275        47,292        38,018        24,951        37,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     164,958        143,967        113,426        62,304        81,930   

Net losses attributable to noncontrolling interests

     (1,550     (36     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to EnerSys stockholders

   $ 166,508      $ 144,003      $ 113,426      $ 62,304      $ 81,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share attributable to EnerSys stockholders:

          

Basic

   $ 3.47      $ 2.95      $ 2.30      $ 1.29      $ 1.68   

Diluted

   $ 3.42      $ 2.93      $ 2.27      $ 1.28      $ 1.66   

Weighted-average number of common shares outstanding:

          

Basic

     48,022,005        48,748,205        49,376,132        48,122,207        48,824,434   

Diluted

     48,635,449        49,216,035        50,044,246        48,834,095        49,420,303   
     Fiscal Year Ended March 31,  
     2013     2012     2011     2010     2009  
     (In thousands)  

Consolidated cash flow data:

          

Net cash provided by operating activities

   $ 244,400      $ 204,196      $ 76,459      $ 136,602      $ 219,437   

Net cash used in investing activities

     (55,092     (72,420     (91,661     (77,244     (46,810

Net cash used in financing activities

     (95,962     (79,382     (82,677     (24,472     (23,196

Other operating data:

          

Capital expenditures

     55,286        48,943        59,940        45,111        57,143   
     As of March 31,  
     2013     2012     2011     2010     2009  
     (In thousands)  

Consolidated balance sheet data:

          

Cash and cash equivalents

   $ 249,348      $ 160,490      $ 108,869      $ 201,042      $ 163,161   

Working capital

     685,403        611,372        554,164        475,768        429,769   

Total assets

     1,987,867        1,924,955        1,828,387        1,652,010        1,492,851   

Total debt, including capital leases, excluding discount on the Convertible Notes

     178,489        256,101        253,400        350,486        375,656   

Total EnerSys stockholders’ equity

     1,169,401        1,032,195        974,331        779,897        670,151   

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial condition for the fiscal years ended March 31, 2013, 2012, and 2011, should be read in conjunction with our audited consolidated financial statements and the notes to those statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations and intentions and beliefs. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors. See “Cautionary Note Regarding Forward-Looking Statements,” “Business” and “Risk Factors,” sections elsewhere in this Annual Report on Form 10-K. In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Annual Report on Form 10-K.

EnerSys’ management uses the non-GAAP measures, EBITDA and Adjusted EBITDA, in its computation of compliance with loan covenants. These measures, as used by EnerSys, adjust net earnings determined in accordance with GAAP for interest, taxes, depreciation and amortization, and certain charges or credits as permitted by our credit agreements, that were recorded during the periods presented.

EnerSys’ management uses the non-GAAP measures, Primary Working Capital and Primary Working Capital Percentage (see definition in “Overview” below) along with capital expenditures, in its evaluation of business segment cash flow and financial position performance.

These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for cash flow or operating earnings determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to operating earnings determined in accordance with GAAP.

Overview

We are the global leader in stored energy solutions for industrial applications. We manufacture, market and distribute industrial batteries and related products such as chargers, power equipment and battery accessories, and we provide related after-market and customer-support services for industrial batteries. We market and sell our products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force.

We operate and manage our business in three geographic regions of the world—Americas, EMEA and Asia, as described below. Our business is highly decentralized with manufacturing locations throughout the world. More than half of our manufacturing capacity is located outside of the United States, and approximately 60% of our net sales are generated outside of the United States. The Company has three reportable segments based on geographic regions, defined as follows:

 

   

Americas, which includes North and South America, with our segment headquarters in Reading, Pennsylvania, USA,

 

   

EMEA, which includes Europe, the Middle East and Africa, with our segment headquarters in Zurich, Switzerland, and

 

   

Asia, which includes Asia, Australia and Oceania, with our segment headquarters in Singapore.

 

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See Note 22 to the Consolidated Financial Statements for segment related disclosures.

We evaluate segment performance based primarily upon operating earnings, exclusive of highlighted items. Highlighted items are those that the Company deems are not indicative of ongoing operating results, including those charges that the Company incurs as a result of restructuring activities and those charges and credits that are not directly related to ongoing segment performance. All corporate and centrally incurred costs are allocated to the reportable segments based principally on net sales. We evaluate segment cash flow and financial position performance based primarily upon capital expenditures and Primary Working Capital levels (see definition of Primary Working Capital in “Liquidity and Capital Resources” below).

Our management structure, financial reporting systems, and associated internal controls and procedures, are all consistent with our three geographic segments. We report on a March 31 fiscal year-end. Our financial results are largely driven by the following factors:

 

   

global economic conditions and general cyclical patterns of the industries in which our customers operate;

 

   

changes in our selling prices and, in periods when our product costs increase, our ability to raise our selling prices to pass such cost increases through to our customers;

 

   

the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity;

 

   

the extent to which we can control our fixed and variable costs, including those for our raw materials, manufacturing, distribution and operating activities;

 

   

changes in our level of debt and changes in the variable interest rates under our credit facilities;

 

   

the mix of earnings in the various tax jurisdictions we operate in and their tax impact on our income tax rates; and

 

   

the size and number of acquisitions and our ability to achieve their intended benefits.

We have two primary industrial battery product lines: reserve power products and motive power products. Net sales classifications by product line are as follows:

 

   

Reserve power products are used for backup power for the continuous operation of critical applications in telecommunications systems, UPS applications for computer and computer-controlled systems, and other specialty power applications, including security systems, premium starting, lighting and ignition applications, in switchgear, electrical control systems used in electric utilities, large scale energy storage, energy pipelines, in commercial aircraft, satellites, military aircraft, submarines, ships and tactical vehicles

 

   

Motive power products are used to provide power for manufacturing, warehousing and other material handling equipment, primarily electric industrial forklift trucks, mining equipment, diesel locomotive starting and other rail equipment.

Current Market Conditions

Economic Climate

Recent indicators suggest a mixed trend in economic activity among our different geographical regions. The Americas’ and Asia’s economic expansion continues but at a slower rate. The ongoing financial crisis and austerity measures in Europe are a factor in slowing overall economic growth in this region and leading to declining economic growth rates in many of the Western European countries.

Overall, on a consolidated basis, we have experienced stable trends in our revenue and order rates.

 

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We believe we are well positioned to take advantage of future growth in our markets. We continue to take numerous steps to restructure our manufacturing base and administrative operations to reduce our costs. We have developed new product initiatives in advanced nickel, TPPL for motive power and large scale energy storage. We expect the economic climate and our strong capital structure will be conducive to a continuation of acquisitions which in combination with our new product initiatives will help grow our business faster than the overall market growth.

Volatility of Commodities and Foreign Currencies

Our most significant commodity and foreign currency exposures are related to lead and the euro. Volatility of commodity costs and foreign currency exchange rates have caused large swings in our production costs. As the global economic climate changes, we anticipate that our commodity costs may continue to fluctuate significantly as they have in the past several years.

Customer Pricing

Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 35% of our revenue is currently subject to agreements that adjust pricing to a market-based index for lead. During fiscal 2011 and 2012, our selling prices increased, to reflect the rising commodity prices, and declined slightly in fiscal 2013.

Liquidity and Capital Resources

Current market conditions related to our liquidity and capital resources are favorable. In March 2011, we refinanced our 2008 senior secured credit facility with a $350 million revolving credit line gaining additional flexibility in terms, liquidity, and an extended maturity to March 2016. We believe current conditions remain favorable for the Company to have continued positive cash flow from operations that, along with available cash and cash equivalents and our undrawn lines of credit, will be sufficient to fund our capital expenditures, acquisitions and other investments for growth.

Our cash flows from operating activities were $244 million and $204 million during fiscal 2013 and 2012, respectively. We invested $55 million and $49 million in capital expenditures in fiscal 2013 and 2012, respectively. We also repurchased $23 million and $58 million of our common stock in fiscal 2013 and 2012, respectively. Our investments in new business opportunities in fiscal 2012 were $24 million.

As a result of the above actions, at March 31, 2013, our financial position is strong and we have substantial liquidity with $249 million of available cash and cash equivalents, $349 million of undrawn, committed credit lines, and over $120 million of uncommitted credit lines. A substantial majority of the Company’s cash and investments are held by foreign subsidiaries and are considered to be indefinitely reinvested and expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.

Cost Savings Initiatives-Restructuring

Cost savings programs remain a continuous element of our business strategy and are directed primarily at further reductions in plant manufacturing (labor and overhead), raw material costs and our operating expenses (primarily selling, general and administrative). In order to realize cost savings benefits for a majority of these initiatives, costs are incurred either in the form of capital expenditures, funding the cash obligations of previously recorded restructuring expenses or current period expenses.

In fiscal 2010, we began the restructuring programs primarily related to the Oerlikon acquisition in Europe and completed the restructuring as of March 31, 2012.

 

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During fiscal 2011, we began further restructuring programs related to our EMEA operations, including distribution, which upon completion is expected to result in the reduction of approximately 60 employees. Our fiscal 2013 operating results reflected approximately $4.0 million of favorable annualized pre-tax earnings impact of these programs. This program has been completed as of March 31, 2013.

During fiscal 2012, we announced restructuring programs related to our operations in EMEA, primarily consisting of the transfer of manufacturing of select products between certain of our manufacturing operations and restructuring of our selling, general and administrative operations. These actions are expected to result in the reduction of approximately 85 employees upon completion. Our fiscal 2013 operating results reflected approximately $4.6 million of the estimated $6.0 million of favorable annualized pre-tax earnings impact of the fiscal 2012 programs. The Company does not expect to be committed to significant additional restructuring charges in fiscal 2014 related to these actions and expects to complete the program during fiscal 2014.

During fiscal 2013, the Company announced further restructurings related to improving the efficiency of its manufacturing operations in EMEA, primarily consisting of cash expenses for employee severance-related payments and non-cash expenses associated with the write-off of certain fixed assets and inventory. The Company estimates that these actions will result in the reduction of approximately 130 employees upon completion. Our fiscal 2013 operating results reflect approximately $1.3 million of the estimated $7.0 million of favorable annualized pre-tax earnings impact of the fiscal 2013 programs. The Company expects to be committed to an additional $3.0 million of restructuring charges related to these programs during fiscal 2014, and expects to complete the program during fiscal 2015.

During fiscal 2013, the Company announced a restructuring related to the closure of its manufacturing facility located in Chaoan, People’s Republic of China, in which the Company will transfer the manufacturing at that location to its Chongqing, People’s Republic of China facility to improve operational efficiencies. The Company expects to be committed to an additional $0.7 million related to the program and expects to complete the program in fiscal 2014.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Notes to Consolidated Financial Statements in Item 8. In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. We discuss below the more significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.

Revenue Recognition

We recognize revenue when the earnings process is complete. This occurs when risk and title transfers, collectability is reasonably assured and pricing is fixed and determinable. Shipment terms to our battery product customers are either shipping point or destination and do not differ significantly between our business segments of the world. Accordingly, revenue is recognized when risk and title is transferred to the customer. Amounts invoiced to customers for shipping and handling are classified as revenue. Taxes on revenue producing transactions are not included in net sales.

We recognize revenue from the service of reserve power and motive power products when the respective services are performed.

 

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Management believes that the accounting estimates related to revenue recognition are critical accounting estimates because they require reasonable assurance of collection of revenue proceeds and completion of all performance obligations. Also, revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. These estimates are based on our past experience.

Asset Impairment Determinations

We test for the impairment of our goodwill and indefinite-lived trademarks at least annually and whenever events or circumstances occur indicating that a possible impairment has been incurred. We utilize financial projections, certain cash flow measures, as well as our market capitalization in the determination of the estimated fair value of these assets.

With respect to our other long-lived assets other than goodwill and indefinite-lived trademarks, we test for impairment when indicators of impairment are present. An asset is considered impaired when the undiscounted estimated net cash flows expected to be generated by the asset are less than its carrying amount. The impairment recognized is the amount by which the carrying amount exceeds the fair value of the impaired asset.

In making future cash flow analyses of goodwill and other long-lived assets, we make assumptions relating to the following:

 

   

the intended use of assets and the expected future cash flows resulting directly from such use;

 

   

industry-specific economic conditions;

 

   

competitor activities and regulatory initiatives; and

 

   

client and customer preferences and patterns.

We believe that an accounting estimate relating to asset impairment is a critical accounting estimate because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our financial statements.

Litigation and Claims

From time to time, the Company has been or may be a party to various legal actions and investigations including, among others, employment matters, compliance with government regulations, federal and state employment laws, including wage and hour laws, contractual disputes and other matters, including matters arising in the ordinary course of business. These claims may be brought by, among others, governments, customers, suppliers and employees. Management considers the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims. In determining legal reserves, management considers, among other issues:

 

   

interpretation of contractual rights and obligations;

 

   

the status of government regulatory initiatives, interpretations and investigations;

 

   

the status of settlement negotiations;

 

   

prior experience with similar types of claims;

 

   

whether there is available insurance coverage; and

 

   

advice of outside counsel.

 

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Environmental Loss Contingencies

Accruals for environmental loss contingencies (i.e., environmental reserves) are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Management views the measurement of environmental reserves as a critical accounting estimate because of the considerable uncertainty surrounding estimation, including the need to forecast well into the future. From time to time, we may be involved in legal proceedings under federal, state and local, as well as international environmental laws in connection with our operations and companies that we have acquired. The estimation of environmental reserves is based on the evaluation of currently available information, prior experience in the remediation of contaminated sites and assumptions with respect to government regulations and enforcement activity, changes in remediation technology and practices, and financial obligations and creditworthiness of other responsible parties and insurers.

Warranty

We record a warranty reserve for possible claims against our product warranties, which generally run for a period ranging from one to twenty years for our reserve power batteries and for a period ranging from one to seven years for our motive power batteries. The assessment of the adequacy of the reserve includes a review of open claims and historical experience.

Management believes that the accounting estimate related to the warranty reserve is a critical accounting estimate because the underlying assumptions used for the reserve can change from time to time and warranty claims could potentially have a material impact on our results of operations.

Allowance for Doubtful Accounts

We encounter risks associated with sales and the collection of the associated accounts receivable. We record a provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate provision, management analyzes the creditworthiness of specific customers and the aging of customer balances. Management also considers general and specific industry economic conditions, industry concentration and contractual rights and obligations.

Management believes that the accounting estimate related to the allowance for doubtful accounts is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and uncollectible accounts could potentially have a material impact on our results of operations.

Retirement Plans

We use certain assumptions in the calculation of the actuarial valuation of our defined benefit plans. These assumptions include the discount rate, expected long-term rates of return on assets and rates of increase in compensation levels. Changes in these assumptions can result in changes to the recognized pension expense and recorded liabilities.

We account for our defined benefit pension plans in accordance with the Financial Accounting Standards Board (“FASB”) guidance. The guidance requires an entity to recognize in its statements of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, measure a defined benefit postretirement plan’s assets and obligation that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the change occurs.

Critical accounting estimates and assumptions related to the actuarial valuation of our defined benefit plans are evaluated periodically as conditions warrant and changes to such estimates are recorded.

Equity-Based Compensation

We recognize compensation cost relating to equity-based payment transactions by using a fair-value measurement method, in accordance with FASB guidance on accounting for share-based payment. FASB

 

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guidance requires all equity-based payments to employees, including grants of restricted stock units, stock options and market share units, to be recognized as compensation expense based on fair value at grant date over the requisite service period of the awards. We determine the fair value of restricted stock units based on the quoted market price of our common stock on the date of grant. The fair value of stock options is determined using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate the fair value. The fair value of market share units is estimated at the date of grant using a binomial lattice model. Both models incorporate various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the awards. When estimating the requisite service period of the awards, we consider many related factors including types of awards, employee class, and historical experience. Actual results, and future changes in estimates of the requisite service period may differ substantially from our current estimates.

Income Taxes

Our effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. We account for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.

We evaluate, on a quarterly basis, our ability to realize deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

 

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Results of Operations—Fiscal 2013 Compared to Fiscal 2012

The following table presents summary consolidated statement of income data for fiscal year ended March 31, 2013, compared to fiscal year ended March 31, 2012:

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)  
     In
Millions
    As %
Net Sales
    In
Millions
    As %
Net Sales
    In
    Millions    
    %  

Net sales

   $ 2,277.6        100.0   $ 2,283.4        100.0   $ (5.8     (0.3 )% 

Cost of goods sold

     1,708.2        75.0        1,770.7        77.6        (62.5     (3.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     569.4        25.0        512.7        22.4        56.7        11.0   

Operating expenses

     312.3        13.7        297.8        13.0        14.5        4.9   

Restructuring charges

     7.2        0.3        5.0        0.2        2.2        43.6   

Legal proceedings settlement income

     —          —          (0.9     (0.1     0.9        NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     249.9        11.0        210.8        9.3        39.1        18.5   

Interest expense

     18.7        0.8        16.5        0.7        2.2        13.6   

Other (income) expense, net

     0.9        0.1        3.1        0.2        (2.2     (70.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     230.3        10.1        191.2        8.4        39.1        20.4   

Income tax expense

     65.3        2.9        47.3        2.1        18.0        38.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     165.0        7.2        143.9        6.3        21.1        14.6   

Net losses attributable to noncontrolling interests

     (1.5     (0.1     (0.1     —          (1.4     NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to EnerSys stockholders

   $ 166.5        7.3   $ 144.0        6.3   $ 22.5        15.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM = not meaningful

Overview

Our sales in fiscal 2013 were relatively flat at approximately $2.3 billion compared to prior year sales. Acquisitions and improvement in organic volume contributed approximately 2% and 1%, respectively, and were offset by a 3% decrease due to foreign currency translation impact. Despite sales being relatively flat, the gross margin percentage in fiscal 2013 was up 260 basis points at 25.0% versus 22.4% in fiscal 2012, due mainly to lower commodity costs.

A discussion of specific fiscal 2013 versus fiscal 2012 operating results follows, including an analysis and discussion of the results of our reportable segments.

Net Sales

Net sales by reportable segment were as follows:

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     % Net
Sales
    In
Millions
     % Net
Sales
    In
Millions
        %      

EMEA

   $ 926.2         40.7   $ 995.4         43.6   $ (69.2     (7.0 )% 

Americas

     1,126.9         49.5        1,082.8         47.4        44.1        4.1   

Asia

     224.5         9.8        205.2         9.0        19.3        9.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total net sales

   $ 2,277.6         100.0   $ 2,283.4         100.0   $ (5.8     (0.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

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The EMEA segment’s revenue decreased by $69.2 million or 7.0% in fiscal 2013, as compared to fiscal 2012. A negative currency translation impact of approximately 6% combined with a decrease in organic volume and pricing of approximately 2% and 1%, respectively, partially offset by a 2% increase from acquisitions resulted in the decreased revenue.

The Americas segment’s revenue increased by $44.1 million or 4.1% in fiscal 2013, as compared to fiscal 2012, primarily due to an increase in organic volume and acquisitions of approximately 3% and 2%, respectively, partially offset by a negative currency translation impact of approximately 1%.

The Asia segment’s revenue increased by $19.3 million or 9.4% in fiscal 2013 as compared to fiscal 2012. Higher organic volume and acquisitions contributed approximately 5% and 7%, respectively, partially offset by a decrease in both pricing and currency translation impact of approximately 1%.

Net sales by product line were as follows:

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
      %    

Reserve power

   $ 1,119.1         49.1   $ 1,092.7         47.9   $ 26.4        2.4

Motive power

     1,158.5         50.9        1,190.7         52.1        (32.2     (2.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total net sales

   $ 2,277.6         100.0   $ 2,283.4         100.0   $ (5.8     (0.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Sales in our reserve power product line increased in fiscal 2013 by $26.4 million or 2.4% compared to the prior year primarily due to acquisitions and higher organic volume which contributed approximately 3% each, offset by negative currency translation impact and price decreases of approximately 3% and 1%, respectively.

Sales in our motive power product line decreased in fiscal 2013 by $32.2 million or 2.7% compared to the prior year primarily due to currency translation impact and decrease in organic volume of approximately 3% and 1%, respectively, partially offset by a 1% increase due to acquisitions.

Gross Profit

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
       %    

Gross profit

   $ 569.4         25.0   $ 512.7         22.4   $ 56.7         11.0

Gross profit increased $56.7 million or 11.0% in fiscal 2013 compared to fiscal 2012. Gross profit, excluding the effect of foreign currency translation, increased $69 million or 13.4% in fiscal 2013 compared to fiscal 2012. This increase is primarily attributed to lower commodity costs with pricing declining slightly. We have made great efforts to sustain gross margin and continue to focus on a wide variety of sales initiatives, which include improving product mix to higher margin products and obtaining appropriate pricing for products relative to our costs. At the same time, we continue to focus on cost savings initiatives such as relocating production to low cost facilities and implementing more automation in our manufacturing plants.

 

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Operating Items

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
      %    

Operating expenses

   $ 312.3         13.7   $ 297.8         13.0   $ 14.5        4.9

Restructuring charges

     7.2         0.3        5.0         0.2        2.2        43.6   

Legal proceedings settlement income

     —           —          0.9         0.1        (0.9     NM   

 

NM = not meaningful

Operating Expenses

Operating expenses increased $14.5 million or 4.9% in fiscal 2013 from fiscal 2012. Operating expenses, excluding the effect of foreign currency translation, increased $25.5 million or 8.6% in fiscal 2013 compared to fiscal 2012. As a percentage of sales, operating expenses increased from 13.0% in fiscal 2012 to 13.7% in fiscal 2013 partially as a result of higher payroll related costs, including stock compensation expense.

Restructuring Charges

In fiscal 2013, we recorded $7.2 million of restructuring charges, primarily for staff reductions and asset write-offs in Europe and Asia.

In fiscal 2012, we recorded $5.0 million of restructuring charges, primarily for staff reductions in Europe.

The fiscal 2012 and 2013 restructuring programs are expected to incur additional restructuring charges of approximately $4.0 million during fiscal 2014.

Operating Earnings

Operating earnings by segment were as follows:

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales(1)
    In
Millions
    As %
Net Sales(1)
    In
Millions
      %    

EMEA

   $ 64.2         6.9   $ 63.9        6.4   $ 0.3        0.3

Americas

     171.7         15.3        138.8        12.8        32.9        23.7   

Asia

     21.2         9.4        12.2        5.9        9.0        74.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

Subtotal

     257.1         11.3        214.9        9.4        42.2        19.6   

Restructuring charges-EMEA

     4.5         0.5        5.0        0.5        (0.5     (10.3

Restructuring charges-Asia

     2.7         1.2        —          —          2.7        NM   

Legal proceedings settlement income-EMEA

     —           —          (0.9     (0.1     0.9        NM   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 249.9         11.0   $ 210.8        9.3   $ 39.1        18.5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.

Fiscal 2013 operating earnings of $249.9 million were $39.1 million higher than in fiscal 2012 and were 11.0% of sales. Fiscal 2013 operating earnings were favorably affected by organic volume, acquisitions, our continuing cost savings programs and lower commodity costs. Fiscal 2013 and 2012 operating earnings included $7.2 million and $5.0 million, respectively, of restructuring charges and $0.3 million and $2.8 million, respectively, for acquisition activity related expense.

 

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Table of Contents

The EMEA segment’s operating earnings, excluding the highlighted items discussed above, increased $0.3 million or 0.3% in fiscal 2013 compared to fiscal 2012. Benefits of the restructuring programs on both production and operating expenses and lower commodity costs kept operating earnings relatively flat compared to the prior year despite the economic downturn in the region.

The Americas segment’s operating earnings increased $32.9 million or 23.7% in fiscal 2013, with the operating margin increasing 250 basis points to 15.3%. This increase of operating margin in our Americas segment is primarily due to an increase in organic volumes and decreased commodity costs and better product mix.

Operating earnings in Asia, excluding the highlighted items discussed above, increased 74.3% in fiscal 2013 in comparison to fiscal 2012, with the operating margin as a percentage of sales increasing by 350 basis points to 9.4%. The increase in our Asia segment earnings in fiscal 2013 was primarily attributable to volume increase and better product mix.

Interest Expense

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
       %    

Interest expense

   $ 18.7         0.8   $ 16.5         0.7   $ 2.2         13.6

Interest expense of $18.7 million in fiscal 2013 (net of interest income of $1.4 million) was $2.2 million higher than the $16.5 million in fiscal 2012 (net of interest income of $0.9 million). The increase in interest expense in fiscal 2013 compared to fiscal 2012 is attributable primarily to higher interest expense on indebtedness in Asia and South America where we made recent acquisitions and higher bond accretion partially offset by lower average borrowings.

Our average debt outstanding (including the average amount of the Convertible Notes discount of $20.8 million) was $246.3 million in fiscal 2013, compared to our average debt outstanding (including the average amount of the Convertible Notes discount of $27.5 million) of $270.1 million in fiscal 2012. Our average cash interest rate incurred in fiscal 2013 was 4.2% compared to 3.1% in fiscal 2012.

Included in interest expense is non-cash, accreted interest on the Convertible Notes of $7.0 million in fiscal 2013 and $6.4 million in fiscal 2012. Also included in interest expense are non-cash charges related to amortization of deferred financing fees of $1.3 million in both fiscal 2013 and fiscal 2012.

Other (Income) Expense, Net

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
      %    

Other (income) expense, net

   $ 0.9         0.1   $ 3.1         0.2   $ (2.2     (70.1 )% 

Other (income) expense, net was expense of $0.9 million in fiscal 2013 compared to expense of $3.1 million in fiscal 2012. Current year includes foreign currency losses of $1.9 million, miscellaneous charges of $0.8 million partially offset by insurance recoveries of $1.8 million. Prior year includes foreign currency losses of $1.5 million and other miscellaneous charges of $1.6 million.

 

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Earnings Before Income Taxes

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
       %    

Earnings before income taxes

   $ 230.3         10.1   $ 191.2         8.4   $ 39.1         20.4

As a result of the factors discussed above, fiscal 2013 earnings before income taxes were $230.3 million, an increase of $39.1 million or 20.4% compared to fiscal 2012.

Income Tax Expense

 

     Fiscal 2013     Fiscal 2012     Increase (Decrease)   
     In
Millions
    As %
Net Sales
    In
Millions
    As %
Net Sales
    In
Millions
       %    

Income tax expense

   $ 65.3        2.9   $ 47.3        2.1   $ 18.0         38.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Effective tax rate

     28.4       24.7       
  

 

 

     

 

 

        

The effective income tax rate was 28.4% in fiscal 2013 compared to the fiscal 2012 effective tax rate of 24.7%. The rate increase in fiscal 2013 as compared to fiscal 2012 is primarily due to changes in the mix of earnings among tax jurisdictions and the increase in non-deductible expenses in certain jurisdictions.

Results of Operations—Fiscal 2012 Compared to Fiscal 2011

The following table presents summary Consolidated Statement of Income data for fiscal year ended March 31, 2012, compared to fiscal year ended March 31, 2011:

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
    As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
    %  

Net sales

   $ 2,283.4        100.0   $ 1,964.4         100.0   $ 319.0        16.2

Cost of goods sold

     1,770.7        77.6        1,514.6         77.1        256.1        16.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Gross profit

     512.7        22.4        449.8         22.9        62.9        14.0   

Operating expenses

     297.8        13.0        259.2         13.2        38.6        14.9   

Legal proceedings settlement income

     (0.9     (0.1     —          —         (0.9     NM   

Restructuring charges

     5.0        0.2        6.8         0.3        (1.8     (26.8
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Operating earnings

     210.8        9.3        183.8         9.4        27.0        14.7   

Interest expense

     16.5        0.7        22.0         1.1        (5.5     (25.2

Other (income) expense, net

     3.1        0.2        2.2         0.2        0.9        40.9   

Charges related to refinancing

     —         —         8.2         0.4        (8.2     NM   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Earnings before income taxes

     191.2        8.4        151.4         7.7        39.8        26.3   

Income tax expense

     47.3        2.1        38.0         1.9        9.3        24.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Net earnings

     143.9        6.3        113.4         5.8        30.5        26.9   

Net losses attributable to noncontrolling interests

     (0.1     —         —          —         (0.1     NM   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Net earnings attributable to EnerSys stockholders

   $ 144.0        6.3   $ 113.4         5.8   $ 30.6        27.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

NM = not meaningful

 

33


Table of Contents

Overview

Our sales in fiscal 2012 were approximately $2.3 billion, a 16.2% increase from prior year sales primarily due to an improvement in organic volume and acquisitions of approximately 8% and 4%, respectively. Despite higher sales, the gross margin percentage in fiscal 2012 was down 50 basis points at 22.4% versus 22.9% in fiscal 2011, due mainly to higher commodity costs and unforeseen plant interruptions at two of our facilities.

Our financial position continued to be strong and we had substantial liquidity from our cash and cash equivalents, committed and uncommitted credit lines and our 2011 Credit Facility. Our positive cash flows and liquidity enabled us to continue to invest in new business opportunities such as acquisitions in South Africa, South America, Germany and India and to repurchase our shares.

A discussion of specific fiscal 2012 versus fiscal 2011 operating results follows, including an analysis and discussion of the results of our segments.

Net Sales

Total net sales increased 16.2% or $319 million in fiscal 2012 from fiscal 2011. This was due to an 8% or $149 million increase in organic volume and price increases of 2% or $49 million. Acquisitions in fiscal 2012 added approximately 4% or $73 million to net sales. Fluctuations in the U.S. dollar versus foreign currencies increased sales by 2% or $48 million.

Fluctuations in foreign currencies had a positive impact on sales of fiscal 2012 versus fiscal 2011. The euro exchange rate to the U.S. dollar averaged $1.39 / € in fiscal 2012, compared to $1.33 / € in fiscal 2011 and $1.42 / € in fiscal 2010.

Net sales by segment were as follows:

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
    Millions     
       % Net
Sales
    In
    Millions     
       % Net
Sales
    In
    Millions    
     %  

EMEA

   $ 995.4           43.6   $ 890.3           45.3   $ 105.1         11.8

Americas

     1,082.8           47.4        896.6           45.7        186.2         20.8   

Asia

     205.2           9.0        177.5           9.0        27.7         15.6   
  

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total net sales

   $ 2,283.4           100.0   $ 1,964.4           100.0   $ 319.0         16.2
  

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

The EMEA segment’s revenue increased by $105.1 million or 11.8% in fiscal 2012, as compared to fiscal 2011. Acquisitions and currency translation impact contributed approximately 5% and 4%, respectively, while increases in pricing contributed approximately 2%. Organic volume in EMEA was flat.

The Americas segment’s revenue increased by $186.2 million or 20.8% in fiscal 2012, as compared to fiscal 2011, primarily due to higher organic volume, which contributed approximately a 15% increase. Price increases and acquisitions contributed approximately 3% each to the improvement.

The Asia segment’s revenue increased by $27.7 million or 15.6% in fiscal 2012 as compared to fiscal 2011. Higher organic volume and currency translation impact contributed approximately 8% and 7%, respectively, while increases in pricing contributed approximately 1%.

 

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Table of Contents

Net sales by product line were as follows:

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
     Millions    
     As
%Net
Sales
    In
     Millions    
     As
%Net
Sales
    In
     Millions    
     %  

Reserve power

   $ 1,092.7         47.9   $ 970.4         49.4   $ 122.3         12.6

Motive power

     1,190.7         52.1        994.0         50.6        196.7         19.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total net sales

   $ 2,283.4         100.0   $ 1,964.4         100.0   $ 319.0         16.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Sales in our reserve power product line increased in fiscal 2012 by $122.3 million or 12.6% compared to the prior year primarily due to acquisitions and higher organic volume which contributed approximately 5% and 4%, respectively. Currency translation impact and price increases contributed approximately 3% and 1%, respectively.

Sales in our motive power product line increased in fiscal 2012 by $196.7 million or 19.8% compared to the prior year primarily due to an increase in organic volume of approximately 11%. Price increases, acquisitions and currency translation impact contributed approximately 4%, 3% and 2%, respectively.

Gross Profit

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
     %  

Gross profit

   $ 512.7         22.4   $ 449.8         22.9   $ 62.9         14.0

Gross profit increased $62.9 million or 14.0% in fiscal 2012 compared to fiscal 2011. Gross profit, excluding the effect of foreign currency translation, increased $55 million or 12.3% in fiscal 2012 compared to fiscal 2011. Lead costs represented approximately 34% of total cost of goods sold for fiscal 2012 as compared to approximately 33% of total cost of goods sold for fiscal 2011. We made great efforts to sustain gross margin in an environment of rising commodity and energy costs, and continued to focus on a wide variety of sales initiatives, which included improving product mix to higher margin products and obtaining appropriate pricing for products relative to our costs. At the same time, we continued to focus on cost savings initiatives such as relocating production to low cost facilities and implementing more automation in our manufacturing plants.

Operating Items

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
    %  

Operating expenses

   $ 297.8         13.0   $ 259.2         13.2   $ 38.6        14.9

Legal proceedings settlement income

     0.9         0.1        —          —         0.9        NM   

Restructuring charges

     5.0         0.2        6.8         0.3        (1.8     (26.8

 

NM = not meaningful

Operating Expenses

Operating expenses increased $38.6 million or 14.9% in fiscal 2012 from fiscal 2011. Operating expenses, excluding the effect of foreign currency translation, increased $29.4 million or 11.4% in fiscal 2012 compared to fiscal 2011. As a percentage of sales, operating expenses decreased from 13.2% in fiscal 2011 to 13.0% in fiscal 2012. The 20 basis point decrease was achieved by leveraging our operating expenses with higher sales.

 

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Table of Contents

Legal Proceedings Settlement Income

In fiscal 2009, the Court of Commerce in Lyon, France ruled that the Company’s French subsidiary, EnerSys Sarl, which was acquired by the Company in 2002, was partially responsible for a 1999 fire in a French hotel under construction. The Company’s portion of damages was assessed at €2.7 million or $4.2 million, which was duly recorded and paid by the Company, but the ruling was appealed. In a subsequent ruling by the Court of Appeal of Lyon, France, the portion of damages was reduced, entitling the Company to a refund of the monies paid of €0.7 million or $0.9 million, which has been recorded and collected in the second quarter of fiscal 2012. The Company further appealed the ruling to the French Supreme Court, which on March 14, 2012, ruled in the Company’s favor and ordered the case back to the Court of Appeal of Lyon to further review certain aspects of the original decision in the case, including the assessment of damages. The Court of Appeal of Lyon heard arguments on April 9, 2013 and a ruling is expected in the second quarter of fiscal 2014.

Restructuring Charges

In fiscal 2012, we recorded $5.0 million of restructuring charges, primarily for staff reductions in Europe.

In fiscal 2011, we recorded $6.8 million of restructuring charges, of which $2.5 million related to the continuation of the restructuring program of our Oerlikon operations begun in fiscal 2010, and $4.3 million related primarily to new fiscal 2011 programs to further restructure our European operations, including distribution.

At March 31, 2012, the Oerlikon and fiscal 2009 European restructuring programs were completed. The fiscal 2011 and 2012 restructuring programs incurred additional restructuring charges of approximately $1 million in fiscal 2013.

Operating Earnings

Fiscal 2012 operating earnings of $210.8 million were $27.0 million higher than in fiscal 2011 and was 9.3% of sales. Fiscal 2012 operating earnings were favorably affected by higher organic volume, our continuing cost savings programs and price increases, partially offset by higher commodity costs. Fiscal 2012 and 2011 operating earnings included $5.0 million and $6.8 million, respectively, of restructuring charges and $2.8 million and $2.5 million, respectively, for acquisition activity related expense in EMEA, Americas and Asia.

Operating earnings by segment were as follows:

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
    As %
Net Sales(1)
    In
Millions
     As %
Net Sales(1)
    In
Millions
    %  

EMEA

   $ 63.9        6.4   $ 55.6         6.3   $ 8.3        14.8

Americas

     138.8        12.8        124.5         13.9        14.3        11.6   

Asia

     12.2        5.9        10.5         5.9        1.7        15.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Subtotal

     214.9        9.4        190.6         9.7        24.3        12.7   

Legal proceedings settlement income-EMEA

     (0.9     (0.1     —          —         (0.9     NM   

Restructuring charges-EMEA

     5.0        0.5        6.8         0.8        (1.8     (26.8
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 210.8        9.3   $ 183.8         9.4   $ 27.0        14.7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.

The EMEA segment’s operating earnings, excluding the highlighted items discussed above, increased $8.3 million or 14.8% in fiscal 2012 compared to fiscal 2011. This improvement in operating earnings, despite a negative impact of approximately $2 million due to a three-week strike at our manufacturing plant in Poland in

 

36


Table of Contents

the second quarter of fiscal 2012 and start-up costs relating to our new business in Germany of approximately $1.3 million, is primarily attributable to pricing and the benefits of the restructuring programs on both production and operating expenses, partially offset by higher commodity costs.

The Americas segment’s operating earnings increased $14.3 million or 11.6% in fiscal 2012, with the operating margin decreasing 110 basis points to 12.8%. This decline of operating margin in our Americas segment, despite a 15% increase in organic volumes, was due to increased commodity costs net of pricing and product mix.

Operating earnings in Asia increased 15.9% in fiscal 2012 in comparison to fiscal 2011, with the operating margin as a percentage of sales remaining flat at 5.9%. The increase in our Asia segment earnings in fiscal 2012 was primarily attributable to volume increase and better product mix, offset partially by higher commodity costs. We incurred approximately $3.8 million of start-up costs related to our new facility in Chongqing, China in fiscal 2012. Start-up costs related to Chongqing were approximately $1.6 million in fiscal 2011. In addition, we incurred approximately $0.9 million in fiscal 2012, costs related to a temporary closure of our facility in Jiangsu Province, People’s Republic of China, by government authorities for an environmental review, as were, to our knowledge, all lead processing facilities in that province. After completion of the review, the government authorities allowed the plant to reopen in November 2011 on a conditional basis with the understanding that the Company would work with the assistance of the government agencies, to relocate to a more preferable location.

Interest Expense

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
    %  

Interest expense

   $ 16.5         0.7   $ 22.0         1.1   $ (5.5     (25.2 )% 

Interest expense of $16.5 million in fiscal 2012 (net of interest income of $0.9 million) was $5.5 million lower than the $22.0 million in fiscal 2011 (net of interest income of $1.3 million). The decrease in interest expense in fiscal 2012 compared to fiscal 2011 is attributable primarily to $6.7 million of expense associated with outstanding interest rate hedging contracts in the prior fiscal year. In fiscal 2012, the swaps no longer qualified for hedge accounting and losses realized on the swaps amounting to $1.0 million were included in other (income) expense, net. Lower interest expense in fiscal 2012 was also due to lower average borrowings offset by higher interest expense in Asia and South America.

Our average debt outstanding (including the average amount of the Convertible Notes discount of $27.5 million) was $270.1 million in fiscal 2012, compared to our average debt outstanding (including the average amount of the Convertible Notes discount of $33.7 million) of $326.3 million, in fiscal 2011. Our average cash interest rate incurred in fiscal 2012 was 3.1% compared to 4.4% in fiscal 2011.

Included in interest expense is non-cash, accreted interest on the Convertible Notes of $6.4 million in fiscal 2012 and $5.9 million in fiscal 2011. Also included in interest expense are non-cash charges related to amortization of deferred financing fees of $1.3 million in fiscal 2012, compared to $1.9 million, in fiscal 2011.

Charges Related to Refinancing

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
    %  

Charges related to refinancing

   $ —           —     $ 8.2         0.4   $ (8.2     NM   

In fiscal 2011, we incurred charges in connection with the refinancing of our credit facility. These charges included $2.3 million in write offs of deferred financing fees and $5.9 million of unrealized losses on account of discontinuing hedge accounting for the interest rate swap agreements.

 

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Table of Contents

Other (Income) Expense, Net

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
     %  

Other (income) expense, net

   $ 3.1         0.2   $ 2.2         0.2   $ 0.9         40.9

Other (income) expense, net was expense of $3.1 million in fiscal 2012 compared to expense of $2.2 million in fiscal 2011. This $0.9 million unfavorable change is attributable to $1.5 million foreign currency losses in fiscal 2012 compared to $0.7 million foreign currency losses in the comparable prior year period and unrealized losses of $1.0 million on interest rate swaps as discussed above, offset by the $0.6 million for the secondary offering fees related to the shares sold by certain stockholders of the Company, including affiliates of Metalmark Capital LLC and certain other institutional stockholders in fiscal 2011.

Earnings Before Income Taxes

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
     As %
Net Sales
    In
Millions
     As %
Net Sales
    In
Millions
     %  

Earnings before income taxes

   $ 191.2         8.4   $ 151.4         7.7   $ 39.8         26.3

As a result of the factors discussed above, fiscal 2012 earnings before income taxes were $191.2 million, an increase of $39.8 million or 26.3% compared to fiscal 2011.

Income Tax Expense

 

     Fiscal 2012     Fiscal 2011     Increase (Decrease)  
     In
Millions
    As %
Net Sales
    In
Millions
    As %
Net Sales
    In
Millions
     %  

Income tax expense

   $ 47.3        2.1   $ 38.0        1.9   $ 9.3         24.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Effective tax rate

     24.7       25.1       
  

 

 

     

 

 

        

The effective income tax rate was 24.7% in fiscal 2012, compared to the fiscal 2011 effective tax rate of 25.1%. The rate decrease in fiscal 2012 as compared to fiscal 2011 is primarily due to changes in the mix of earnings among tax jurisdictions.

Liquidity and Capital Resources

Overview

As we discussed in our Overview and Current Market Conditions above, our results have been significantly affected by the economic environment during the past three fiscal years. In periods of increasing revenue, such as in fiscal 2012 and 2011, operating cash flow was generally reduced by the need for additional Primary Working Capital. In fiscal 2013, revenue and Primary Working Capital remained relatively flat. We have maintained sufficient lines of credit since the Company was formed in 2000 to fund our requirements for Primary Working Capital, capital expenditures, acquisitions, common stock repurchases and other investments. As discussed earlier, we believe that the 2011 Credit Facility, which consists of a revolving line of credit of $350 million expiring in March 2016, along with other credit lines of $148 million and our available cash and cash equivalents of $249.3 million as of March 31, 2013, will be sufficient for our needs and anticipated growth in the foreseeable future.

Cash Flow and Financing Activities

Cash and cash equivalents at March 31, 2013, 2012 and 2011, were $249.3 million, $160.5 million and $108.9 million, respectively.

 

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Table of Contents

Cash provided by operating activities for fiscal 2013, 2012 and 2011, was $244.4 million, $204.2 million and $76.5 million, respectively.

During fiscal 2013, cash from operating activities was provided primarily from net earnings of $165.0 million, depreciation and amortization of $50.5 million and a net source of $26.4 million from non-cash interest expense, provision for doubtful accounts, deferred taxes, net gains and settlements on derivatives, stock compensation, asset write-offs related to restructuring and losses on disposal of fixed assets. Primary Working Capital improved by $9.9 million and was offset partially by a change in current and other assets, accrued expenses, and other liabilities of $7.4 million.

During fiscal 2012, cash from operating activities was provided primarily from net earnings of $144.0 million, depreciation and amortization of $50.4 million and a net source of $14.5 million from non-cash interest expense, provision for doubtful accounts, deferred taxes, net gains and settlements on derivatives, stock compensation and gains on disposal of fixed assets. Change in current and other assets, accrued expenses, and other liabilities contributed a further $20.2 million, offset by a $24.9 million increase in Primary Working Capital.

During fiscal 2011, cash from operating activities was provided primarily from net earnings of $113.4 million, depreciation and amortization of $44.4 million and a net source of $17.6 million from non-cash interest expense, write-off of deferred finance fees, provision for doubtful accounts, deferred taxes and stock compensation. This cash flow was partially offset by an $86.7 million increase in Primary Working Capital and a $12.2 million net increase in current and other assets, accrued expenses, and other liabilities.

As explained in the discussion of our use of “non-GAAP financial measures,” we monitor the level and percentage of Primary Working Capital to sales. Primary Working Capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable and the resulting net amount is divided by the trailing three-month net sales (annualized) to derive a Primary Working Capital percentage. Primary Working Capital was $552.7 million (yielding a Primary Working Capital percentage of 24.2%) at March 31, 2013 and $578.6 million (yielding a Primary Working Capital percentage of 24.4%) at March 31, 2012. The 20 basis point decrease at March 31, 2013 versus March 31, 2012 was mainly attributed to a drop in accounts receivable balances while sales were flat.

Primary Working Capital and Primary Working Capital percentages at March 31, 2013, 2012 and 2011 are computed as follows:

 

At March 31,

   Trade
Receivables
     Inventory      Accounts
Payable
    Primary
Working
Capital
     Quarter
Revenue
Annualized
     Primary
Working
Capital
(%)
 
            (in millions)                

2013

   $ 448.1       $ 353.9       $ (249.3   $ 552.7       $ 2,288.5         24.2

2012

   $ 466.8       $ 361.8       $ (250.0   $ 578.6       $ 2,371.0         24.4

2011

   $ 464.1       $ 335.0       $ (251.8   $ 547.3       $ 2,192.2         25.0

Cash used in investing activities for fiscal 2013, 2012 and 2011 was $55.1 million, $72.4 million and $91.7 million, respectively. Capital expenditures were $55.3 million, $48.9 million and $59.9 million in fiscal 2013, 2012 and 2011, respectively. The current year’s capital spending focused primarily on TPPL capacity expansion in EMEA and Americas, completion of expansion of our Chongqing plant in the People’s Republic of China and the acquisition of land, building and equipment in our primary lithium business in Pennsylvania. Our purchases of and investments in businesses were $23.6 million and $32.2 million in fiscal 2012 and 2011, respectively. No acquisitions were made during fiscal 2013.

During fiscal 2013, we borrowed $246.0 million on our revolver and repaid $325.4 million. Borrowings on long-term debt and short-term debt were $5.6 million and $7.4 million, respectively, which were partially offset by repayments of long-term debt of $16.5 million in Asia. During fiscal 2013, we repurchased $22.6 million of our common stock.

 

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During fiscal 2012, we borrowed $111.6 million on our revolver and repaid $132.2 million. Borrowings financed a portion of our repurchases of common stock of $58.4 million and acquisitions of $23.6 million.

During fiscal 2011, we repaid $201.1 million of the 2008 Credit Facility and $11.1 million of the Euro 25,000 Credit Facility Agreement among EnerSys Holdings (Luxembourg), S.a.r.l., San Paolo IMI S.p.A., as Facility Agent and lender, and Banca Intesa S.p.A., as lender (the “Euro Term Loan”) with $100 million of revolver proceeds borrowed under the new 2011 Credit Facility and available cash and cash equivalents. Additionally, in fiscal 2011, we borrowed under the 75,000 Chinese Renminbi (“RMB”) credit facility (“China Term Loan”), $6.1 million, $3.1 million of short-term debt and paid $3.5 million in refinancing fees related to the 2011 Credit Facility.

The exercise of stock options and the related tax benefits contributed $11.3 million, $2.7 million and $24.0 million, respectively, in fiscal 2013, 2012 and 2011.

As a result of the above, cash and cash equivalents increased $88.8 million from $160.5 million at March 31, 2012 to $249.3 million at March 31, 2013.

We currently are in compliance with all covenants and conditions under our credit agreements.

In addition to cash flows from operating activities, we had available committed and uncommitted credit lines of approximately $469 million at March 31, 2013 to cover short-term liquidity requirements. Our 2011 Credit Facility is committed through March 2016, as long as we continue to comply with the covenants and conditions of the credit facility agreement. Included in our available credit lines at March 31, 2013 is $348.8 million of our 2011 Credit Facility.

We believe that our cash flow from operations, available cash and cash equivalents and available borrowing capacity under our credit facilities will be sufficient to meet our liquidity needs, including normal levels of capital expenditures, for the foreseeable future; however, there can be no assurance that this will be the case.

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements during any of the periods covered by this report.

Contractual Obligations and Commercial Commitments

At March 31, 2013, we had certain cash obligations, which are due as follows:

 

     Total      Less than
1 year
     2 to 3
years
     4 to 5
years
     After
5 years
 
     (in millions)  

Debt obligations

   $ 195.2       $ 22.7       $ 172.5       $ —        $ —    

Interest on debt

     12.6         5.8         6.8         —           —    

Operating leases

     64.0         19.4         24.5         11.5         8.6   

Pension benefit payments and profit sharing

     30.4         2.5         4.7         5.7         17.5   

Restructuring

     2.0         2.0         —          —          —    

Facility construction commitments

     10.0         10.0         —          —          —    

Interest rate swap agreements

     0.6         0.6         —          —          —    

Lead and foreign currency forward contracts

     4.8         4.8         —          —          —    

Purchase commitments

     10.6         10.6         —          —          —    

Capital lease obligations, including interest

     0.5         0.3         0.2         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330.7       $ 78.7       $ 208.7       $ 17.2       $ 26.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Due to the uncertainty of future cash outflows, uncertain tax positions have been excluded from the table above.

Under our 2011 Credit Facility and other credit arrangements, we had outstanding standby letters of credit of $11.9 million as of March 31, 2013.

Credit Facilities and Leverage

Our focus on working capital management and cash flow from operations is measured by our ability to reduce debt and reduce our leverage ratios. Shown below are the leverage ratios at March 31, 2013 and 2012, in connection with our 2011 Credit Facility.

The total net debt as defined under our 2011Credit Facility is $81.6 million for fiscal 2013 and is 0.3 times adjusted EBITDA (non-GAAP) as described below and reflects improved net earnings and positive cash flows.

The following table provides a reconciliation of net earnings to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP) as per our 2011 Credit Facility:

 

     Fiscal 2013     Fiscal 2012  
     (in millions, except ratios)  

Net earnings as reported

   $ 165.0      $ 144.0   

Add back:

    

Depreciation and amortization

     50.5        50.4   

Interest expense

     18.7        16.5   

Income tax expense

     65.3        47.3   
  

 

 

   

 

 

 

EBITDA (non GAAP)(1)

   $ 299.5      $ 258.2   

Adjustments per credit agreement definitions

     14.7 (2)      11.6 (2) 
  

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP) per credit agreement

   $ 314.2      $ 269.8   
  

 

 

   

 

 

 

Total net debt(3)

   $ 81.6      $ 214.4   
  

 

 

   

 

 

 

Leverage ratios:

    

Total net debt/adjusted EBITDA ratio(4)

     0.3 X        0.8 X   

Maximum ratio permitted

     3.25 X        3.25 X   

Consolidated interest coverage ratio(5)

     23.2 X        22.6 X   

Minimum ratio required

     4.5 X        4.5 X   

 

(1) We have included EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP) because our lenders use it as a key measure of our performance. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. EBITDA is not a measure of financial performance under GAAP and should not be considered an alternative to net earnings or any other measure of performance under GAAP or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Our calculation of EBITDA may be different from the calculations used by other companies, and therefore comparability may be limited. Certain financial covenants in our 2011 Credit Facility are based on EBITDA, subject to adjustments, which are shown above. Continued availability of credit under our 2011 Credit Facility is critical to our ability to meet our business plans, we believe that an understanding of the key terms of our credit agreement is important to an investor’s understanding of our financial condition and liquidity risks. Failure to comply with our financial covenants, unless waived by our lenders, would mean we could not borrow any further amounts under our revolving credit facility and would give our lenders the right to demand immediate repayment of all outstanding revolving credit loans. We would be unable to continue our operations at current levels if we lost the liquidity provided under our credit agreements. Depreciation and amortization in this table excludes the amortization of deferred financing fees, which is included in interest expense.

 

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(2) The $14.7 million and $11.6 million adjustment to EBITDA in fiscal 2013 and 2012, respectively, related to the adjustment of non-cash stock compensation expense.
(3) Debt includes capital lease obligations and letters of credit and is net of U.S. cash and cash equivalents and a portion of European cash investments, as defined in the 2011 Credit Facility. In fiscal 2013, U.S. cash and cash equivalents and European cash investments were $26 million and $100 million, respectively, and in fiscal 2012, were $5 million and $70 million, respectively.
(4) These ratios are included to show compliance with the leverage ratios set forth in our credit facilities. We show both our current ratios and the maximum ratio permitted or minimum ratio required under our 2011 Credit Facility.
(5) As defined in the 2011 Credit Facility, interest expense used in the consolidated interest coverage ratio excludes non-cash interest of $8.5 million and includes $3.3 million of interest rate swap contract settlements for fiscal 2013. For fiscal 2012, interest expense used in the consolidated interest coverage ratio excludes non-cash interest of $8.0 million and includes $3.4 million of interest rate swap contract settlements.

EnerSys Stockholders’ Equity

EnerSys stockholders’ equity increased $137.2 million during fiscal 2013 due to net earnings of $166.5 million; $26.1 million of increases related to stock-based compensation and the exercise of stock options; acquisition of noncontrolling interest of $0.6 million; decrease due to repurchase of common shares of $22.6 million; currency translation adjustments of $27.2 million due primarily to the weakening of European currencies; $2.0 million unrealized loss on derivative instruments; and $4.2 million related to pension liabilities.

EnerSys stockholders’ equity increased $57.9 million during fiscal 2012 due to net earnings of $144.0 million; $14.3 million of increases related to stock-based compensation and the exercise of stock options; decrease of $1.0 million due to acquisition of noncontrolling interest in a subsidiary; decrease due to repurchase of common shares of $58.4 million; currency translation adjustments of $32.3 million due primarily to the weakening of European currencies; $3.2 million unrealized loss on derivative instruments; and $5.5 million related to pension liabilities.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

During fiscal 2013, no new accounting standards were adopted or pending adoption that would have a significant impact on our Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.

Related Party Transactions

FASB guidance, Related Party Disclosures requires us to identify and describe material transactions involving related persons or entities and to disclose information necessary to understand the effects of such transactions on our consolidated financial statements. In fiscal 2011, under the terms of a security holder agreement, we paid $0.6 million in fees related to secondary offerings of 2.85 million shares of our common stock to underwriters by certain of our stockholders, including affiliates of Metalmark Capital LLC and certain other institutional stockholders.

 

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Sequential Quarterly Information

Fiscal 2013 and 2012 quarterly operating results, and the associated quarterly trends within each of those two fiscal years, are affected by the same economic and business conditions as described in the fiscal 2013 versus fiscal 2012 analyses previously discussed.

 

    Fiscal 2013     Fiscal 2012  
    July 1,
2012
1st Qtr.
    Sep. 30,
2012
2nd Qtr.
    Dec. 30,
2012
3rd Qtr.
    March 31,
2013
4th Qtr.
    July 3,
2011
1st Qtr.
    Oct. 2,
2011
2nd Qtr.
    Jan. 1,
2012
3rd Qtr.
    March 31,
2012
4th Qtr.
 
    (in millions, except share and per share amounts)  

Net sales

  $ 593.9      $ 554.2      $ 557.3      $ 572.2      $ 569.2      $ 547.2      $ 574.2      $ 592.8   

Cost of goods sold

    445.6        415.9        413.6        433.1        447.2        432.8        443.4        447.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    148.3        138.3        143.7        139.1        122.0        114.4        130.8        145.5   

Operating expenses

    77.7        74.1        80.2        80.3        72.9        71.9        75.7        77.3   

Restructuring charges

    0.4        1.3        3.7        1.8        0.4        0.9        1.4        2.3   

Legal proceedings settlement income

    —         —          —         —         —         (0.9     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

    70.2        62.9        59.8        57.0        48.7        42.5        53.7        65.9   

Interest expense

    4.7        5.0        4.6        4.4        3.4        4.1        4.8        4.2   

Other (income) expense, net

    1.2        (1.8     1.3        0.2        1.2        —         1.1        1.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    64.3        59.7        53.9        52.4        44.1        38.4        47.8        60.5   

Income tax expense

    18.7        16.7        15.2        14.7        10.6        10.1        11.0        15.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

    45.6        43.0        38.7        37.7        33.5        28.3        36.8        44.9   

Net losses attributable to noncontrolling interests

    (0.2     (0.8     (0.5     —         —         —         —         (0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to EnerSys stockholders

  $ 45.8      $ 43.8      $ 39.2      $ 37.7      $ 33.5      $ 28.3      $ 36.8      $ 45.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share attributable to EnerSys stockholders:

               

Basic

  $ 0.96      $ 0.91      $ 0.81      $ 0.79      $ 0.67      $ 0.57      $ 0.77      $ 0.95   

Diluted

  $ 0.95      $ 0.90      $ 0.80      $ 0.77      $ 0.66      $ 0.57      $ 0.77      $ 0.94   

Weighted-average number of common shares outstanding:

               

Basic

    47,901,203        48,188,331        48,176,206        47,822,281        50,052,627        49,469,694        47,704,567        47,765,933   

Diluted

    48,426,991        48,719,916        48,682,346        48,712,542        50,668,276        49,806,964        48,045,900        48,343,000   

Net Sales

Quarterly net sales by segment were as follows:

 

     Fiscal 2013     Fiscal 2012  
     1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.     1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.  
     (in millions)  

Net sales by segment:

                

EMEA

   $ 237.1      $ 215.4      $ 231.4      $ 242.3      $ 253.0      $ 245.3      $ 247.6      $ 249.5   

Americas

     288.9        276.7        275.8        285.5        259.2        252.3        281.2        290.1   

Asia

     67.9        62.1        50.1        44.4        57.0        49.6        45.4        53.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 593.9      $ 554.2      $ 557.3      $ 572.2      $ 569.2      $ 547.2      $ 574.2      $ 592.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment net sales as % of total:

                

EMEA

     39.9     38.9     41.5     42.3     44.4     44.8     43.1     42.1

Americas

     48.7        49.9        49.5        49.9        45.6        46.1        49.0        48.9   

Asia

     11.4        11.2        9.0        7.8        10.0        9.1        7.9        9.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly net sales by product line were as follows:

 

     Fiscal 2013     Fiscal 2012  
     1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.     1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.  
     (in millions)  

Net sales by product line:

                

Reserve power

   $ 289.3      $ 285.3      $ 265.2      $ 279.3      $ 265.9      $ 267.3      $ 277.3      $ 282.2   

Motive power

     304.6        268.9        292.1        292.9        303.3        279.9        296.9        310.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 593.9      $ 554.2      $ 557.3      $ 572.2      $ 569.2      $ 547.2      $ 574.2      $ 592.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Product line net sales as % of total:

                

Reserve power

     48.7     51.5     47.6     48.8     46.7     48.9     48.3     47.6

Motive power

     51.3        48.5        52.4        51.2        53.3        51.1        51.7        52.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

Our cash flows and earnings are subject to fluctuations resulting from changes in interest rates, foreign currency exchange rates and raw material costs. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.

Counterparty Risks

We had entered into interest rate swap agreements to manage risk on a portion of our long-term floating-rate debt. We have entered into lead forward purchase contracts to manage risk on the cost of lead. We have entered into foreign exchange forward contracts to manage risk on foreign currency exposures. The Company’s agreements are with creditworthy financial institutions. Those contracts that result in a liability position at March 31, 2013 are $4.8 million (pre-tax), therefore, there is no risk of nonperformance by these counterparties. Those contracts that result in an asset position at March 31, 2013 are $1.3 million (pre-tax) and the vast majority of these will settle within one year. The impact on the Company due to nonperformance by the counterparties has been evaluated and not deemed material.

Interest Rate Risks

We are exposed to changes in variable U.S. interest rates on borrowings under our credit agreements. On a selective basis, from time to time, we enter into interest rate swap agreements to reduce the negative impact that increases in interest rates could have on our outstanding variable rate debt. At the end of fiscal 2011, these interest rate swaps no longer qualified for hedge accounting due to the refinancing of the Company’s then existing credit facility. Changes in the fair value of these contracts for fiscal 2013 and 2012 have therefore been recorded in the Consolidated Statements of Income in other (income) expense, net, while changes in fair value for the comparable period in fiscal 2011 were recorded in accumulated other comprehensive income.

At March 31, 2013 and 2012, the aggregate notional amount of interest rate swap agreements is $65.0 million and $85.0 million, respectively. These agreements expired in May 2013.

Under the interest rate swaps, the Company received three-month LIBOR and paid a fixed interest rate which averaged 4.32% and 4.28%, on March 31, 2013 and 2012, respectively.

 

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A 100 basis point increase in interest rates would have increased annual interest expense by approximately $0.2 million on the variable rate portions of our debt.

Commodity Cost Risks—Lead Contracts

We have a significant risk in our exposure to certain raw materials. Our largest single raw material cost is for lead, for which the cost remains volatile. In order to hedge against increases in our lead cost, we have entered into contracts with financial institutions to fix the price of lead. A vast majority of such contracts are for a period not extending beyond one year. We had the following contracts outstanding at the dates shown below:

 

Date

   $’s Under Contract      # Pounds Purchased      Average
Cost/Pound
     Approximate % of
Lead Requirements(1)
 
     (in millions)      (in millions)                

March 31, 2013

   $ 56.6         56.3       $ 1.00         12

March 31, 2012

     56.6         60.0         0.94         12   

March 31, 2011

     68.2         63.4         1.08         14   

 

(1) Based on the fiscal year lead requirements for the period then ended.

We estimate that a 10% increase in our cost of lead would have increased our annual cost of goods sold by approximately $54 million for the fiscal year ended March 31, 2013.

Foreign Currency Exchange Rate Risks

We manufacture and assemble our products globally in the Americas, EMEA and Asia. Approximately 60% of our sales and expenses are transacted in foreign currencies. Our sales revenue, production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. Additionally, as we report our financial statements in U.S. dollars, our financial results are affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar. The principal foreign currencies in which we conduct business are the Euro, Swiss franc, British pound, Polish zloty, Chinese renminbi and Mexican peso.

We quantify and monitor our global foreign currency exposures. Our largest foreign currency exposure is from the purchase and conversion of U.S. dollar based lead costs into local currencies in EMEA. Additionally, we have currency exposures from intercompany financing and trade transactions. On a selective basis, we enter into foreign currency forward contracts and option contracts to reduce the impact from the volatility of currency movements; however, we cannot be certain that foreign currency fluctuations will not impact our operations in the future.

 

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To hedge these exposures, we have entered into forward contracts with financial institutions to fix the value at which we will buy or sell certain currencies. The vast majority of such contracts are for a period not extending beyond one year. Forward contracts outstanding as of March 31, 2013 were $73.1 million. The details of contracts outstanding as of March 31, 2013 were as follows:

 

Transactions Hedged

   $US
Equivalent
(in millions)
     Average Rate
Hedged
     Approximate % of
Annual
Requirements(1)
 

Sell Euros for U.S. dollars

   $ 20.5         $/€1.30         12

Sell Euros for Polish zloty

     14.2         PLN/€ 4.18         20   

Sell Euros for British pounds

     25.1         £/€ 0.81         41   

Sell South African Rand for Euros

     4.4         ZAR/€ 11.85         34   

Sell Australian dollars for U.S. dollars

     1.3         $/AUD 1.03         13   

Sell U.S. dollars for Mexican pesos

     2.5         MXN/$ 13.44         50   

Sell Australian dollars for Euros

     2.2         AUD/€ 1.28         17   

Other

     2.9         
  

 

 

       

Total

   $ 73.1         
  

 

 

       

 

(1) Based on the fiscal year currency requirements for the year ended March 31, 2013.

Foreign exchange translation adjustments are recorded as a separate component of accumulated other comprehensive income in EnerSys’ stockholders’ equity and noncontrolling interests.

Based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual exposures and hedges, actual gains and losses in the future may differ from our historical results.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Contents

EnerSys

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm (on Consolidated Financial Statements and Schedule)

     48   

Report of Independent Registered Public Accounting Firm (on Internal Control Over Financial Reporting)

     49   

Audited Consolidated Financial Statements

  

Consolidated Balance Sheets as of March 31, 2013 and 2012

     50   

Consolidated Statements of Income for the Fiscal Years Ended March 31, 2013, 2012 and 2011

     51   

Consolidated Statements of Comprehensive Income for the Fiscal Years Ended March  31, 2013, 2012 and 2011

     52   

Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended March  31, 2013, 2012 and 2011

     53   

Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2013, 2012 and 2011

     54   

Notes to Consolidated Financial Statements

     55   

  1. Summary of Significant Accounting Policies

     55   

  2. Acquisitions

     62   

  3. Inventories

     63   

  4. Property, Plant, and Equipment

     63   

  5. Goodwill and Other Intangible Assets

     63   

  6. Prepaid and Other Current Assets

     64   

  7. Accrued Expenses

     65   

  8. Debt

     65   

  9. Leases

     68   

10. Other Liabilities

     68   

11. Fair Value of Financial Instruments

     69   

12. Derivative Financial Instruments

     70   

13. Income Taxes

     74   

14. Retirement Plans

     76   

15. Stockholders’ Equity and Noncontrolling Interests

     81   

16. Stock-Based Compensation

     83   

17. Earnings Per Share

     86   

18. Commitments, Contingencies and Litigation

     86   

19. Restructuring Plans

     87   

20. Warranty

     90   

21. Other (Income) Expense, Net and Charges Related to Refinancing

     90   

22. Operations by Industry Segment and Geographic Area

     91   

23. Quarterly Financial Data (Unaudited)

     92   

24. Subsequent Events

     92   

 

47


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

EnerSys

We have audited the accompanying consolidated balance sheets of EnerSys as of March 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of EnerSys at March 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EnerSys’ internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 28, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

May 28, 2013

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

EnerSys

We have audited EnerSys’ internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). EnerSys’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, EnerSys maintained, in all material respects, effective internal control over financial reporting as of March 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EnerSys as of March 31, 2013 and 2012 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2013 of EnerSys and our report dated May 28, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

May 28, 2013

 

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Table of Contents

EnerSys

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

 

     March 31,  
     2013     2012  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 249,348      $ 160,490   

Accounts receivable, net of allowance for doubtful accounts (2013—$9,292; 2012—$10,022)

     448,068        466,769   

Inventories, net

     353,941        361,774   

Deferred taxes

     37,786        30,247   

Prepaid and other current assets

     63,819        52,393   
  

 

 

   

 

 

 

Total current assets

     1,152,962        1,071,673   

Property, plant, and equipment, net

     350,126        353,215   

Goodwill

     345,499        352,737   

Other intangible assets, net

     103,701        107,082   

Deferred taxes

     14,168        15,999   

Other assets

     21,411        24,249   
  

 

 

   

 

 

 

Total assets

   $ 1,987,867      $ 1,924,955   
  

 

 

   

 

 

 
Liabilities and Equity     

Current liabilities:

    

Short-term debt

   $ 22,702      $ 16,042   

Current portion of long-term debt

     —          2,540   

Current portion of capital lease obligations

     311        409   

Accounts payable

     249,359        249,996   

Accrued expenses

     191,664        188,403   

Deferred taxes

     3,523        2,911   
  

 

 

   

 

 

 

Total current liabilities

     467,559        460,301   

Long-term debt

     155,273        236,589   

Capital lease obligations

     203        521   

Deferred taxes

     88,036        84,479   

Other liabilities

     90,418        92,468   
  

 

 

   

 

 

 

Total liabilities

     801,489        874,358   

Commitments and contingencies

     —         —     

Redeemable noncontrolling interests

     11,095        9,782   

Equity:

    

Series A Convertible Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at March 31, 2013 and at March 31, 2012

     —         —    

Common Stock, $0.01 par value, 135,000,000 shares authorized, 52,970,281 shares issued and 47,840,204 shares outstanding at March 31, 2013; 52,247,014 shares issued and 47,800,129 shares outstanding at March 31, 2012

     529        522   

Additional paid-in capital

     501,646        474,924   

Treasury stock at cost, 5,130,077 shares held as of March 31, 2013 and 4,446,885 shares held as of March 31, 2012

     (100,776     (78,183

Retained earnings

     727,347        560,839   

Accumulated other comprehensive income

     40,655        74,093   
  

 

 

   

 

 

 

Total EnerSys stockholders’ equity

     1,169,401        1,032,195   

Nonredeemable noncontrolling interests

     5,882        8,620   
  

 

 

   

 

 

 

Total equity

     1,175,283        1,040,815   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,987,867      $ 1,924,955   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

EnerSys

Consolidated Statements of Income

(In Thousands, Except Share and Per Share Data)

 

     Fiscal year ended March 31,  
     2013     2012     2011  

Net sales

   $ 2,277,559      $ 2,283,369      $ 1,964,462   

Cost of goods sold

     1,708,203        1,770,664        1,514,618   
  

 

 

   

 

 

   

 

 

 

Gross profit

     569,356        512,705        449,844   

Operating expenses

     312,324        297,806        259,217   

Restructuring charges

     7,164        4,988        6,813   

Legal proceedings settlement income

     —          (900     —    
  

 

 

   

 

 

   

 

 

 

Operating earnings

     249,868        210,811        183,814   

Interest expense

     18,719        16,484        22,038   

Charges related to refinancing

     —         —         8,155   

Other (income) expense, net

     916        3,068        2,177   
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     230,233        191,259        151,444   

Income tax expense

     65,275        47,292        38,018   
  

 

 

   

 

 

   

 

 

 

Net earnings

     164,958        143,967        113,426   

Net losses attributable to noncontrolling interests

     (1,550     (36     —    
  

 

 

   

 

 

   

 

 

 

Net earnings attributable to EnerSys stockholders

   $ 166,508      $ 144,003      $ 113,426   
  

 

 

   

 

 

   

 

 

 

Net earnings per common share attributable to EnerSys stockholders:

      

Basic

   $ 3.47      $ 2.95      $ 2.30   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 3.42      $ 2.93      $ 2.27   
  

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares outstanding:

      

Basic

     48,022,005        48,748,205        49,376,132   
  

 

 

   

 

 

   

 

 

 

Diluted

     48,635,449        49,216,035        50,044,246   
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

EnerSys

Consolidated Statements of Comprehensive Income

(In Thousands)

 

     Fiscal year ended March 31,  
     2013     2012     2011  

Net earnings

   $ 164,958      $ 143,967      $ 113,426   

Other comprehensive income (loss):

      

Net unrealized gain (loss) on derivative instruments, net of tax

     (2,007     (3,261     9,470   

Pension funded status adjustment, net of tax

     (4,187     (5,470     1,967   

Foreign currency translation adjustment

     (28,894     (32,516     36,539   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (35,088     (41,247     47,976   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     129,870        102,720        161,402   

Comprehensive income (loss) attributable to noncontrolling interests

     (3,200     (196     335   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to EnerSys stockholders

   $ 133,070      $ 102,916      $ 161,067   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

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Table of Contents

EnerSys

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands)

 

    Series A
Convertible
Preferred
Stock
    Common
Stock
    Paid-in
Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
EnerSys
Stockholders’
Equity
    Non-
redeemable

Non-
controlling
Interests
    Total
Equity
 

Balance at March 31, 2010

  $ —        $ 504      $ 428,579      $ (19,800   $ 303,410      $ 67,204      $ 779,897      $ 4,327      $ 784,224   

Stock-based compensation

    —          —          9,056        —          —          —          9,056        —          9,056   

Exercise of stock options

    —          14        17,880        —          —          —          17,894        —          17,894   

Tax benefit from stock options

    —          —          6,082        —          —          —          6,082        —          6,082   

Net earnings

    —          —          —          —          113,426        —          113,426        —          113,426   

Other comprehensive income:

                 

Pension funded status adjustment (net of tax expense of $794)

    —